Heavy truck sales are running at nearly double the levels of a year ago. Shippers are complaining they can't get enough trucks on time. Some carriers are imposing fuel surcharges and even making tardy shippers pay for loading delays. Sounds like heaven. Can it last? In a word, yes. But a number of events could bring carriers back down to earth.
A variety of data shows that the economy is experiencing unusually balanced growth. The broadest measure of the economy's strength, real (that is, net of inflation) gross domestic product (GDP), climbed 4.4% at a seasonally adjusted annual rate in the first quarter.
Before your eyes glaze over, here's what that mouthful means. GDP is the value of all goods and services produced in the U.S. Change in GDP is a reasonable proxy for freight volume; while trucks generally carry goods, service activities also generate demand for freight. Seasonal adjustment is a statistical way of removing the normal variation in some activities that regularly occurs between different months or quarters so the underlying growth can be identified. Annual rate refers to the rate that would occur if a single quarter's growth continued for a full year, allowing meaningful comparisons between one quarter and a full year.
By itself a 4.4% growth rate is not remarkable. But it follows a half-year in which real GDP grew at a 6.1% annual rate, the strongest in nearly 20 years. So far, it looks as if the second quarter was equally robust.
Manufacturing has been booking new orders at a higher rate for nearly a year. The monthly payroll employment reports from the Bureau of Labor Statistics have shown employment gains in more and more industries. Also, wage increases have been slim and the unemployment rate has remained stable. These are signs that the pickup in employment has not led to labor shortages so far. In fact, total non-farm payroll employment is still below its pre-recession peak. Thus, employers should be able to keep expanding without being caught in a wage-price spiral.
Despite the modest wage hikes, non-wage income is growing rapidly, enabling consumers to enjoy increases in personal income that beat inflation. Higher incomes plus rising home values have boosted personal consumption expenditures, the broadest measure of household purchases.
What could cause the good times to run off the road rather than keep rolling? The biggest risk may be the very condition that has kept trucks so busy: Businesses have learned to rely on “rolling warehouses” instead of tying up inventory in the back room, where it can become obsolete, get damaged, or walk out the door unpaid-for. But if everyone orders more at once, there may not be enough goods, or trucks, or truck drivers to satisfy demand.
There have already been scattered examples of such bottlenecks. The most dramatic occurred last summer, when tight electricity transmission capacity (exacerbated by computer and human errors) caused a massive power blackout and when Phoenix ran out of gasoline after a pipeline broke. Last winter, low inventories of scrap iron caused steel prices to soar and forced construction contractors to juggle schedules when key materials arrived late. More recently, there have been cement shortages in several parts of the country, due more to lack of ships, rail cars or trucks than to inadequate production.
The bottom line: If you've been ordering more trucks, taking on more drivers, and finally dumping profitless customers, you're probably making the right moves for today's economy. The good times should keep rolling. But be prepared for sudden shifts. We are in an era of volatility and nasty surprises.