The recent improvements in the economy and truck freight volume are largely the result of production being ramped back up to meet the slight growth in consumer demand.
Although demand coming from businesses has suffered during this recession, consumer demand continues to hold its own. Demand has benefited from a reduction in taxes, lower interest rates, increased unemployment benefits, and rising wages.
What happened on the supply side? Manufacturers cut production substantially, perhaps because they anticipated the kind of drop-off in consumer spending that occurred in previous recessions. In fact, production was cut far below demand.
As a result, inventories fell very rapidly. In February, for example, they reached their lowest level since 1999. This rapid fall in inventories in the midst of a slight growth in demand led to a surge in orders and production.
Industrial production has now risen in the last three months, and the new-orders component of the Institute of Supply Managers' manufacturing index has risen in the last four months. And now the index stands at its highest level in the last seven years.
But how long can we expect this recent robust growth to last? Soon the economy will be entering a new phase in which sustained improvement will require sustained growth in demand.
Federal Reserve chairman Alan Greenspan summed up this economic conundrum very appropriately: “The pickup in the growth of activity…will be short lived unless sustained increases in final demand kick in before the positive effects of inventory investment dissipate.”
The troubling scenario that now has many investors leery is that there is widespread expectation that consumer demand is likely to wane in coming months. Why? Because there is very little pent-up demand, current debt levels are very high, and interest rates are expected to rise.
So the pressure is now on business to keep the economic expansion going. But we need to see improvements in profits and cash flow so that businesses can hire more aggressively — and thus enable consumers to keep on spending. Increased profits and cash flow will also lead businesses to invest more, which will help fill any gap left by weakening consumer demand.
Fortunately, the profits of both consumer and business spending have shown signs of improvement.
So baring any unforeseen shocks, we expect the economy to face a relatively smooth transition, although one that's modest in size.
If this scenario plays out, we should see a slow growth in freight demand, but with uneven growth in the commodities to be hauled.
Apart from plant closures or realignments that will cause specific lane changes, traffic related to automobile manufacturing and housing starts is probably near its peak. We don't expect sustained growth in either of these sectors due to waning consumer demand.
On the other hand, food service, gasoline, and resort-related traffic should improve steadily through the summer months. What's more, this will serve to benefit those regions hit the hardest during the fourth quarter of last year.
Recovery is taking place, but its magnitude is relative to the decline felt after Sept. 11 and only within those sectors of the economy that are expected to expand.
While we do have a recovery on the horizon, we'll have to settle for an uneven one.
