With manufacturing slowing, inventories high, companies rationalizing employees and a six-month slide in US freight volume and expenditures, 2016 will get off to a slow start, according to the latest Cass Freight Index Report.


And with inventory-carrying costs rising with interest rates and low warehouse vacancy rates pushing the price of warehouse space, the nation’s “bloated” inventories “are becoming a problem”, Cass’s December report said.


The monthly report, which is based upon the US domestic freight shipments of hundreds of clients of the US freight payment and audit specialist Cass across a broad spectrum of industries, indicated that both the number of shipments and freight transportation expenditures continued their downward slide in December, falling 4.9 and 2.7 percent, respectively, compared with November.


While the declines are not unusual for December, but they capped off a second quarter of decline, Cass noted, adding: “In retrospect, 2015 did not even begin to reach the heights we reached in 2014.” By the end of 2015, both shipment volume and expenditures fell back to 2013 levels.


On a year-on-year comparison, expenditures for freight transportation were 5.2 percent lower than at the end of 2014 and shipment volume was down 3.7 percent from the same period.


Although freight shipment volume declined 4.9 percent in December, Cass noted that this year-end drop was not as big as the more than 6.2 percent declines in December 2013 and 2014.


Holiday season retail store sales were strong, but did not meet expectations in 2015. Online sales blew past last year’s record and more than made up for lower brick and mortar sales, it noted. But the discounting started early again this year, muddying Black Friday sales figures, and consumers waited until goods were marked down further before buying. The holiday season was especially a boon for small parcel carriers, it added.


According to Cass, the Department of Commerce reported a 1.1 percent drop in retail trade in December and an 8.2 percent rise in sales for food services and drinking establishments, but consumers remained cautious about extending any new credit for holiday purchases, waiting for the best bargains. Retailers had hoped the extra cash generated by still falling gas prices would boost sales, but instead consumers increased their visits to restaurants and similar businesses, it added.


The Institute of Supply Management’s (ISM) PMI fell again for the second month and the index level has fallen below 50, indicating that the manufacturing sector is contracting. The Production, New Orders and Backlog of Orders sub-indexes are also below 50 and are contracting; however the New Orders sub-index did increase 0.6 percent to 49.2, Cass noted.


Although freight payments fell for the third month in a row, dropping 2.7 percent, this follows a seasonal pattern and aligns somewhat with the drop in shipments. It also reflects falling spot rates caused by excess capacity, Cass noted. There was an increase in spot rates in the week leading up to Christmas, but this was not enough to offset lower expenditures due to lower volume.


“Despite favorable employment/unemployment reports and moderate growth in household wealth and income, consumers are still very conservative,” Cass said, noting that although, in general, consumer sentiments have remained relatively high for most of the year, they trailed downward in the third and fourth quarter.


“Companies are laying off seasonal workers and many are even going beyond that,” it noted. “Macy’s just announced a downsizing that will affect close to 5,000 employees and will see the closing of some of their flagship stores.” Cass expects unemployment to rise again in the first quarter of 2016.


“High inventories are a problem for retailers, wholesalers and manufacturers, so a majority of goods were discounted,” the report added. “The Federal Reserve raised interest rates in December, which puts more pressure on firms holding inventory.


“Inventory-carrying costs rise with interest rates, and the money tied up in inventory that is not moving becomes a liability. And this may get worse, as the Fed has discussed plans to raise rates several times in the coming year,” it noted.


“Low warehouse vacancy rates are pushing the price of warehouse space. In short, the nation’s bloated inventories are becoming a problem.”


It said US export demand was “way off” in 2015 because of global economic conditions and the relative strength of the US dollar, which makes US goods more expensive. “Global conditions are slowly stabilizing, so expect a strengthening in US exports, excluding oil, in 2016. However, the US dollar shows little sign of falling off in the near term.”


Cass noted that the US oil industry took a particularly hard hit as US oil is no longer competitive with the falling oil prices. “This has resulted in a significant drop in fuel and drilling supplies carried by railroads and trucks that were involved in moving pipes, sand, water and waste for fracking mines,” it added.


The low price of natural gas had also further exacerbated the problem as more electric plants convert to natural gas. Railroads and barges have seen their coal shipments erode, and several mines have closed because of a lack of demand.


Noting that energy markets will remain “a wildcard” in 2016, the report concluded:


“With manufacturing slowing, inventories high, companies rationalizing employees and a six-month slide in freight volume and expenditures, 2016 will get off to a slow start.”