2006 freight solid, despite discouraging reports

2006 freight solid, despite discouraging reports

Economic growth in the fourth quarter ended with a whimper, giving reason for economists and stakeholders in freight transportation a reason for concern about what 2006 could bring

Economic growth in the fourth quarter ended with a whimper, giving reason for economists and stakeholders in freight transportation a reason for concern about what 2006 could bring. For all of 2005, U.S. gross domestic product (GDP) grew 3.5%, compared with a relatively meager 1.1% growth in the fourth quarter. In 2004, by contrast, the economy expanded 4.2%.

A staggering 17.5% quarter-over-quarter drop in consumer spending of durable goods – largely due to poor car sales – proved to be the largest drag on economic growth in the fourth quarter. Automobiles make up the lion’s share of durable goods spending and in 2005 accounted for just over one-fifth of retail sales, according to the Census Bureau.

“The falloff on durable goods consumption was expected due to large auto sales over the summer,” Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC), told FleetOwner. “That pushed sales that would’ve happened in the fourth quarter to the third quarter.”

Yet FTR Associates said that the prospects for 2006 still look solid, despite the disappointing fourth quarter. A hotspot for freight movement will continue to be business-related equipment, although it will cool off compared to ‘05, the company said. In 2005, equipment and software spending (i.e., business investments) grew a brisk 10.8%, the Dept. of Commerce said. In 2006, FTR predicted business investments should increase 8%. Business investments accounted for about 8% of the economy in 2005.

Business investment is one area where growth dropped sharply in the fourth quarter, increasing only 3.5% compared with 10.6% the previous quarter. Many fear this is an indication of a “wet blanket” effect slowing growth in the hot business sector, but CMVC’s Brady said that fundamentals support that business investments will bounce back.

“I still expect [business investments] to grow between 6% and 7%,” he noted. “The next quarter will tell. Business profits are relatively good. Sales and utilization are increasing and that should stimulate growth in investment spending.”

Consumer spending, which accounted for 70% of the economy in 2005, is set to grow at a modest pace. Last year, consumer spending expanded 3.6%, marking relatively brisk growth in the face of ballooning energy prices and rising interest rates. But with no relief in sight for energy prices, consumers spending growth could slow to 2.6% in 2006, said Eric Starks, FTR’s president.

“The combination of a healthy labor market, solid business investment and a broad based global economy, still translates to a positive outlook for 2006,” he added. “The economy will be more vulnerable towards the end of the year, as housing and the consumer sector downshift and the economy has to fill the void left by these sectors to keep expanding. Also, energy prices will remain a threat.”

In a separate report released by the American Trucking Assns. (ATA), for-hire truck tonnage dropped 3% during the last month of 2005.

“The 3% drop in truck tonnage in December last year frankly was a bit of a surprise,” Bob Costello, ATA chief economist, said during a conference call with reporters. “A lot of carriers were very upbeat going into the last month of the year so we didn’t expect that magnitude of a drop. Based on anecdotal evidence, much of that drop seemed due to the automotive sector – there’s been a slowdown in automotive production and the automotive sector provides a lot of tonnage.

“We think the economy as a whole is going to grow 3- to 3.5% in 2006, with truck tonnage climbing 2% – mirroring the 2% growth we saw in 2005,” Costello continued. “That may not seem strong, but it is, largely because of truck capacity limits. Truck capacity is growing less than 2%, so it’s behind freight growth.”

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