Freight hitting soft patch as manufacturing optimism dims

Freight hitting soft patch as manufacturing optimism dims

Drop in hiring plans by manufacturers further indicates expectation for slower growth in the near future, according to consulting firm PwC.

Sentiment regarding the direction of the global economy took a sharp turn downward among U.S. industrial manufacturers over the last three months of this year, noted a quarterly survey compiled by global consulting firm PricewaterhouseCoopers (PwC), accompanied by a “softening” of the freight markets as well, according to recent analysis by Stifel Financial Corp.

As a result, Stifel is actually lowering profit expectations for some of the major trucking companies it covers as the firm now expects a slightly less bullish pricing environment in the truckload space to develop along with an expectation of compressed trucking-derived intermodal revenues.

“Freight markets have encountered a soft patch, which has become progressively more pronounced as the year has unfolded,” noted John Larkin, managing director and head of transportation capital markets research at Stifel, in a recent update issued by the firm.

The main reasons he believes the “reasonably pervasive mediocrity in freight markets” will continue span a wide gamut:

  • Anti-business and anti-trade policies and taxes adopted in recent years around the world and throughout the U.S., in particular;
  • Strength in the U.S. dollar, which has constrained exports and encouraged imports, some of which is displacing domestic production;
  • Lower energy prices, which have reduced energy exploration and extraction activities without stimulating, at least so far, consumer spending;
  • Bloated inventories, resulting from excess inventories driven by over-ordering prior to and during the labor-driven disruption at West Coast ports in the second half of 2014 and first half of 2015;
  • Weak consumer spending, which is related to weak job creation and declining real incomes;
  • Finally, tepid capital spending due to a lack of confidence in direction of the U.S. economy.

“Additionally, economic growth in Asia and Europe remains anything but robust, especially as China is struggling to transition from an infrastructure investment and export driven economy to more of an internal consumption based economy,” Larkin noted.

Some of that is reflected in the declining optimism among U.S. manufacturers captured in PwC’s Q3 2015 Manufacturing Barometer, as global economic concerns are “moderating optimism” regarding the domestic outlook, while slowing plans to hire more workers – though the firm stressed that capital and operational spending forecasts among U.S. manufacturing companies remains healthy at the moment.

"U.S. industrial manufacturers became increasingly cautious on the outlook for the global environment as they assessed the impact of the slowdown in China and the strengthening dollar," noted Bobby Bono, PwC's U.S. industrial manufacturing leader, in a statement. 

During the third quarter of 2015, PwC said optimism regarding the direction of the global economy dropped to 23% among the 60 large U.S.-based multinational manufacturers surveyed by the firm; down from 38% in the previous quarter.

In addition, pessimism rose to an equal level with optimism (23%), reflecting an uncertain outlook for international commerce, while 40% percent of respondents indicated they believed the world economy was declining, up from 2%% in the second quarter this year.

Though optimism regarding the U.S. economic outlook is more positive, it, too, took a hit, falling to 60% in the third from 69% in the second quarter this year. 

"Companies are doubling down on what they do best and aggressively building their competitive moats,” noted PwC’s Bono. “At the same time, they are continuing to pull back from overseas expansion, with only 5% indicating plans to open facilities abroad."

He added that a drop in the hiring plans of manufacturers recorded in PwC’s poll may also indicate an expectation for slower growth in the near future.

Additionally, monetary exchange rate is now considered by manufacturers the leading headwind to growth over the next 12 months; a concern cited by 38% of respondents compared to 14% last year.

Bono noted that the more “typical” barriers to growth—lack of demand (32%) and legislative/regulatory pressures (25%)—are taking a back seat as monetary exchange rate takes center stage.

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