Despite a slippage in industrial production numbers and weakening economic growth for the U.S. overall, experts still think freight remains in a “modestly positive” mode for trucking, with impending changes to hours of service (HOS) regulations on July 1 still poised to help carriers win rate increases.
“We think we’re experiencing a ‘weak spot’ in economic growth, but not a downturn,” Jonathan Starks, transportation analyst for FTR Associates, told Fleet Owner.
“We’re getting much more concerned about the slowing industrial production numbers because that would have a big impact on the freight market,” he said. “But our overall base economic projection for the U.S. remains 2% to 2.5% GDP [gross domestic product] growth and if we can slough off this ‘weak spot’ freight volumes should remain relatively stable. So while the economy is not strong, it’s not expected to drop, either.”
The Institute for Supply Management (ISM) noted that economic activity in the manufacturing sector contracted in May for the first time since November 2012, despite an overall uptick in the U.S. economy, with the group’s PMI metric registering 49% in May, a decrease of 1.7 percentage points from April's 50.7%, indicating contraction in manufacturing for the first time since November 2012 and only the second time since July 2009.
“[May’s] PMI reading is at its lowest level since June 2009, when it registered 45.8%,” noted Bradley Holcomb, chair of ISM’s manufacturing business survey committee. “Several comments from [ISM’s] panel indicate a flattening or softening in demand due to a sluggish economy, both domestically and globally.”
Ed Leamer, director of the UCLA Anderson Forecast, issued a far less sanguine outlook for the U.S., noting that despite improvement in both GDP and key economic sectors, the country’s overall growth falls short of the rates required for the national economy to truly recover from the most recent recession.
“Despite the positive growth in GDP and in key economic sectors, the U.S. economy is not in recovery, as the growth falls far short of the levels needed to bring the economy back to trend,” he explained. “U.S. real GDP is now 15.4% below the normal 3% trend. To get back to that 3% trend, we would need 4% growth for 15 years, or 5% growth for eight years, or 6% growth for five years, not the disappointing 2s and 3s we have been racking up recently, which are moving us farther from trend, not closer to it. It's not a recovery. It's not even normal growth. It's bad.”
Leamer added that while growth in GDP is positive, it’s not exceptional, and while jobs numbers are improving, they are not improving but not rapidly enough – with the jobs being created not necessarily jobs that will ensure workers a secure future.
For example, according to the ADP National Employment Report, private sector employment increased by 135,000 jobs from April to May, with April’s job gains revised downward to 113,000 from the 119,000 previously reported.
"The job market continues to expand, but growth has slowed since the beginning of the year. The slowdown is evident across all industries and all but the largest companies,” said Mark Zandi, chief economist of Moody's Analytics. “Manufacturers are reducing payrolls. The softer job market this spring is largely due to significant fiscal drag from tax increases and government spending cuts.”
Still, despite all of those problems, UCLA’s Leamer said that things are slightly better than the recent past and that 2015 is expected to be better than 2014.
“Real GDP edges up to 3% by 2015 [and] the Fed Funds interest rate will remain near zero, as a continuing dose of monetary medicine,” he projected. “The unemployment rate will fall to 6.6% by 2015, due in part to a growing base of discouraged workers. [But] genuinely good news is that we are in the early stages of a real recovery in housing. Housing starts, which fell to a historic low of 550,000 in 2009, will climb back to the normal 1.5 million by 2015."
And it’s that slow-yet-steady economic buoyancy combined with tighter capacity due to HOS rule changes that should end up benefitting trucking from a rate perspective, added FTR’s Starks.
“We still think there will be a [trucking] productivity hit of 3% due to the HOS rule changes, with some segments felling it harder than others,” he explained. “But that’s enough to help change the rate environment.”
Starks noted that while freight volumes have been growing, albeit slowly, the trucking industry has only been able to win rate increases in the 1% to 2% range. “It really takes an operational change to spur rate changes,” he said. “The [trucking] market already is experiencing tight capacity since the latter half of 2012. So with the HOS changes occurring, we should see momentum for higher rates build in the second half of the year.”