"Ex-" Marks the Spot: A Focused Outlook for the Transportation Sector

Ex-transports. Ex-autos. Ex-aircraft. Regular readers of our monthly indicator reports are accustomed to us regularly directing attention toward various measures of “core” industrial activity with respect to orders and production. There are a number of justifications for the exclusion of transportation orders from short-term analysis. Transportation orders are notoriously volatile. Motor vehicle production can be swayed by the timing and length of annual shutdowns for the model year changeover, and auto orders can be subject to two layers of inventory bottlenecks (one at the factory and another on dealer lots). Similarly, the high value of new aircraft and the fitful bursts in which they are placed can eclipse changes in other durable goods orders. In addition, aircraft orders often have long lead times and at times can reflect more about defense spending than private sector expenditures.

In this report, we discuss the relative importance of the transportation sector. We zero in on the sector’s recent performance and discuss what informs our outlook for this important piece of the industrial economy. Coming off its best sales year since 2007, the auto sector is probably not as hot as it was previously, although pent-up demand and an accommodative financing environment are still supportive of growth going forward. The aerospace sector, despite headwinds from slower defense spending, seems to be better poised for growth in our view as air passenger traffic picks up globally and airlines are increasingly looking toward fleet turnover for a number of reasons, not the least of which is to take advantage of the increased fuel efficiency of newer aircraft. Overall, the transportation sector should remain an important driver of industrial activity through the remainder of 2014.