The coming “mother of all capacity shortages” and other economic forecasts

The coming “mother of all capacity shortages” and other economic forecasts

KISSIMMEE, FL.  Analyst John G. Larkin, managing director and head of transportation capital markets research for Stifel, Nicholaus and Company, delivered both good news and sobering insights to the audience assembled here this week for the 77th annual Truckload Carriers Association convention. He had plenty of “things are improving, but…” figures to share on issues such as freight capacity constraints, the state of the U.S. labor force and the declining middle class:

Auto and light truck market: This market segment has seen “quite a rebound,” Larkin said, although the average age of vehicles in this segment is still 11.4 years, so replacement has not been overwhelmingly strong. In fact, the age of vehicles has increased every year since 2002.  There is also good news, at least for OEMs, in these geriatric fleet metrics, however. All those older units represent “a still huge pent-up demand.”

Retail inventories: The retail inventory to sales ratio had been declining up until 2012, but now it is slowly increasing a bit, Larkin noted. This indicates, in part, that retailers are feeling safe enough to invest in a little inventory buffer. However, it may also represent a “just in case” response to the West Coast Port slowdown, which hammered shippers, receivers, freight haulers and import/export related businesses for nine months.

Manufacturing production: This has been a period of recovery for the manufacturing segment, although there has been a slight slowdown in the last couple of months. Still, manufacturing production remains in positive territory as compared to the 30-year average, Larkin noted.

The labor force: In spite of generally declining unemployment numbers, the good news, Larkin pointed out that the “participation rate” of workers actually willing to work has been declining as well over the past six years or so. “People are permanently dropping out of the job market and maxing out on social welfare benefits instead of going to work,” he observed.  “Trucking fleets are not competing with other fleets for drivers; they are competing with the welfare state.”

The employment-to-population ratio has also seen “a big drop since its peak in the mid-1990’s,” he added, while the percentage of unemployed and underemployed has increased.  Interestingly, the GDP (Gross Domestic Product) has managed to increase anyway, due in large measure to enhanced efficiencies, such as the use of robotics in manufacturing and warehousing.

Certain industries have added more jobs than others, Larkin said. Healthcare has been the fastest growing segment, followed by the hospitality and leisure segment, but these tend to be lower paying jobs, he observed. Construction has been the slowest market to rebound, although it has “bounced off the absolute bottom,” and some areas of the country are doing much better than other areas. In Dallas, TX, for instance, new construction is booming, while in Baltimore, MD it is not.

Manufacturing is a similar story, but there has been lots of movement of manufacturing out of the U.S. Larkin said.  Labor-intensive manufacturing is migrating to Mexico where labor is cheaper and resource-intensive manufacturing is moving to Canada. Still, blue collar jobs are actually increasing in the U.S. The jobs are out there, but people are not taking them, he noted.  This is not a trucking-only problem.

Retail: Consumer spending still accounts for about two-thirds of the U.S. economy and activity has pretty much rebounded to levels seen ten years ago, Larkin said [the good news]. However, remember that the population increased seven percent in those intervening years, so on a per-capita basis, consumer spending is still way off. This may be the first generation to have a quality of life not as good as their parents did.

Housing starts: Housing starts dropped 79% during the recession. There has been a partial rebound, but we are nowhere near where we should be, Larkin noted.  Only 26% of Millennials today are married. Marriage is kind of out of vogue, he observed, but it is what drives the economy.  Most people used to marry at a fairly young age and buy a house, buy a car and have children. This is not like the 50s and 60s though, or even like the 80s and 90s. Millennials have “party budgets and no responsibilities instead,” he observed.

The Affordable Care Act: In order to avoid “Obama Care,” many companies are now offering less than 29-hours per week jobs, Larkin said. In other words, good paying jobs have been replaced with part-time and low-paying jobs.  The very regrettable result has been the loss of the middle class in America, and Obama Care has been a primary driver of this phenomena, he added, and of the corresponding rise in class disparity and related issues.

Truckload sector: Trucking still accounts for 75% of the U.S. freight transportation market. Railroads are not going to “take over,” Larkin said. “They can barely handle the percentage of freight that they move now.

Capacity: The forces at work to reducing freight carrying capacity in the trucking industry, however, are “overwhelming,” he noted, citing CSA, tighter Hours of Service regulations, the pending electronic logging mandate, hair follicle drug testing, speed limiters and increased enforcement in general.  To make matters worse, by 2020 the industry could be short a quarter of a million drivers.

“Logistics costs have dropped precipitously since deregulation, Larkin said. “The question now is, ‘What do we do for an encore?’ It is getting harder and harder to get more blood out of a rock.”

By 2017-2019, Larkin predicted, “The mother of all capacity shortages will really materialize. This could actually constrain the growth of the U.S. economy, and this is kind of worrying.”

Diesel prices: In response to a question from the audience about the currently rising diesel prices, Larkin dispelled any false expectations that oil prices would stay low. “Low oil prices will be temporary,” he said. “Six to ten months from now, we will see the supply of shale oil taper off rather significantly. This time, the Saudis have not reduced their own oil production [to reduce global supply and stabilize costs]. And it costs Saudi Arabia much less to produce their oil than shale-derived oil-- only about ten dollars per barrel.

Rebounding: The domestic economy does have the possibility of rebounding; there are lots of positive things going on, especially in the areas of domestic energy production, e-commerce and trade, Larkin noted. “The future looks very bright if government will get out of the way and let us do our jobs,” he said. “That may be a pipe dream, but we can still hope.”

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