Rating freight volumes

Rating freight volumes

With the Federal Reserve indicating that it may continue to push interest rates on the federal funds beyond the current 5% to keep a lid on inflation, some economists are admitting to a bearish long-term outlook. Although the trucking industry is insulated somewhat from the direct repercussions of rates, it would get burned in the event fiscal tightening by the housing market, capital spending or consumers

With the Federal Reserve indicating that it may continue to push interest rates on the federal funds beyond the current 5% to keep a lid on inflation, some economists are admitting to a bearish long-term outlook. Although the trucking industry is insulated somewhat from the direct repercussions of rates, it would get burned in the event fiscal tightening by the housing market, capital spending or consumers.

The housing market, which relies heavily on—well—heavy commodities, has recently shown some wear from rising interest rates. In April housing starts dropped 5.4% below the March rate and 8.0% below that of April 2005, reported the U.S. Census Bureau. On the same month, existing home sales slipped 2.0% compared with March, and was 5.7% below April 2005.

“Our leading indicator for pending home sales was trending lower, and our forecast model is showing a modest decline for the second quarter with sales leveling out before rising in the fourth quarter,” said David Lereah, chief economist for the National Assn. of Realtors. “Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector, which remains at historically high levels.”

Consumer spending, which recently demonstrated a very robust 5.2% growth in the first quarter gross domestic product report, has long shown resiliency in the face of high energy prices. However, when combined with two years of steady interest rate hikes, economists are wondering when the second shoe will drop.

“The economy right now is running on all cylinders, but this is rear-view mirror looking,” said Erich Merkle, director of forecasting for automotive forecasting firm IRN, Inc. at a Bear Stearns teleconference held yesterday. “In the second half of the year, we think consumer spending will show some signs of wear—not necessarily [on a negative trend] in personal consumption—but will decelerate based on the interest rate increases.”

“Typically there is a 15- to 18-month lag on the effects that interest rates have on the economy,” Steve Latin-Kasper, National Truck Equipment Assn. market data and research director told FleetOwner. “We’re coming up to the end of that lead time. There’s potential for much slower growth for the economy as a whole in 2007. It will choke off the amount of credit people can afford in ’07. We would’ve expected the economy to start slowing as a result of one-and-a-half year’s worth of rates increases.”

“The recent data that measures price levels indicates a moderate acceleration [of inflation],” Chris Brady, president of Commercial Motor Vehicle Consulting told FleetOwner. “The Fed doesn’t want that moderate acceleration to gain momentum. If it does, they’ll have to jack up rates higher than planned just to slow inflation down. They’re hoping further moderate increases [in interest rates] will cause [inflation] to stabilize and decrease.”

The trucking industry is generally expecting a slowing but growing overall economy in 2006, Brady noted. Part of that optimism is reflected in fleets submitting record numbers of truck orders to add capacity to meet current demands.

“If [freight volume] projections are too high then those additional trucks you take into your fleets would have a tough time getting filled with freight,” Brady said. “That happens in the business cycle all the time. Particularly now when there’s a long Class 8 [truck] backlog, you know you won’t get your order for several months. You have to accurately anticipate what freight volumes will be.”

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