Freight strong despite GDP dip

Freight strong despite GDP dip

Although U.S. economic growth shrank significantly in the first quarter this year, analysts remain confident that the recovery remains on track – and that the fundamentals supporting increases in freight volumes will remain strong

Although U.S. economic growth shrank significantly in the first quarter this year, analysts remain confident that the recovery remains on track – and that the fundamentals supporting increases in freight volumes will remain strong.

The Bureau of Economic Analysis (BEA) reported that the growth rate in the nation’s gross domestic product (GDP) shrank to an annual rate of 1.8% from 3.1% in the fourth quarter of 2010. The agency noted that the drop in GDP primarily reflected a sharp upturn in imports, a deceleration in personal consumption expenditures (PCE), a larger decrease in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by a sharp upturn in private inventory investment.

However, Kenny Vieth, president and senior analyst with ACT Research Co., told Fleet Owner that the severe 5.2% drop in government spending in the first quarter actually masked steady GDP growth. If government spending had remained flat, essentially at zero, GDP would have increase 2.7%, Vieth said.

“As far as freight goes, we continue to see things moving in the right direction,” he explained. “There’s room to build inventories, which drives shipment volumes, and we continue to see demand from the right sectors of the economy.”

The manufacturing sector, which has largely driven the ongoing recovery in the U.S., still remains confident that business and revenues will remain strong in 2011. According to the most recent U.S. Manufacturing Barometer survey conducted by consulting firm PricewaterhouseCoopers (PwC), projected average growth rate for own-company revenue over the next 12 months increased to 7% in the first quarter from 6.6% in the fourth quarter last year.

Further, 89% of the 63 manufacturing executives polled by PwC expect positive revenue growth for their own companies in the year ahead – an increase of 14 points over first quarter 2010 and 5 points over the fourth quarter. A further 33% are forecasting double-digit growth, a significant increase of 21 points over first quarter 2010, while 56% are forecasting single digit growth. Only 5% forecast negative growth and another 2% are forecasting zero growth, PwC noted.

That confidence is reflected in data tracked by the Institute for Supply Management (ISM). The group’s Manufacturing Business Survey Committee noted that its purchasing managers’ index (PMI) topped 60% for the third consecutive month this past March, noted Norbert Ore, the committee’s chairman – though he cautioned some headwinds are forming for this sector of the economy.

“The recent trend of rapid growth in the manufacturing sector continued in March, [with] the component indexes of the PMI remaining at very positive levels and signaling strong sector performance in the first quarter,” he said.

“Manufacturers are benefiting from strength in new orders and production, but there is significant concern with regard to commodity prices,” Ore stressed. “Many manufacturers indicate the prices they have to pay for inputs are rising, and there is concern about the impact of higher prices on their margins.”

That being said, the overall outlook for trucking remains positive. Benjamin Hartford, an analyst with Wall Street investment firm Robert W. Baird & Co., noted in its May Freight Flows brief that although spot truck demand trends started moderating in April, overall volumes remain at healthy levels.

“Improved demand and constrained capacity is supporting pricing growth across major domestic transportation modes,” Hartford said.

Baird’s Freight Index for the month of March as well as for the first quarter overall topped 5% year-over-year, with demand strongest in the Midwest. “Overall spot demand acceleration continued through March, and though [it] moderated in April, demand in April demand remained at healthy levels relative to recent history,” Hartford noted.

Furthermore, supply/demand dynamics in the spot market remain favorable to carriers, as spot demand acceleration supports rate growth, he said.

“Anecdotes from recently attended conferences reflect the willingness of shippers to absorb higher rates to secure capacity,” Hartford added. “And levels of transactional brokerage business is improving, which we believe reflects better-than-expected recent demand and the inability/unwillingness of brokers/carriers to supply capacity at contracted rates given current market dynamics.”

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