So far, the U.S. economy appears to be acting in Goldilocks fashion. Gross domestic product (GDP) has grown for four years but not overheated. Enough jobs are being created to keep the unemployment rate down but not so many as to create widespread worker shortages or wage spirals. Cost pressures have been limited mostly to raw materials, as producers have come up with enough productivity gains to keep consumer prices in check.
The trucking industry fits this picture. The industry has been rapidly expanding its purchases of new equipment but has found enough customers and drivers to keep the fleets busy. During the 12-month period ending last February, the industry's payroll employment increased by 25,000, a little less than 2%. (Payroll employment does not include owner-operators or other self-employed individuals.) That's in line with the 1.5% increase in total nonfarm payroll employment.
The producer price index (PPI) for trucking services rose 4.7%, similar to the 5.4% increase in the overall PPI for finished goods. Although diesel fuel prices have risen anywhere from 13 to 30% over the year-ago level, truckers have had more success than ever before in passing the higher costs along in the form of fuel surcharges.
But eventually the three bears came home and disturbed Goldilocks' idyll. There might also be three bearers of bad news for trucking.
First, economic growth could slow suddenly, leaving the industry with a lot of shiny new trucks that have no place to go. The first hint of such an occurrence came in the fourth quarter of 2005, when the growth rate of real (net of inflation) GDP slowed to a seasonally adjusted annual rate of 1.7% from 4.1% the previous quarter. Although the economy appears to have rebounded in the first quarter, a downturn in housing and weakness in retail sales could portend lackluster demand for trucking in the rest of 2006.
Second, the industry could run out of affordable workers. Job creation has been strengthening gradually in the economy as a whole. Meanwhile, more high school graduates are going on to college. Motor carriers could find that either other industries or college are luring the recruits who had been taking jobs in trucking.
Third, costs could start to eat into profits. Although diesel prices have been relatively stable for the past five months, last year's hurricanes showed that prices can jump as much as 30 cents in a week. Even if crude oil prices do not rise, fuel costs are likely to go up this year as refiners try to recover their investment in desulfurization equipment. Ultra-low-sulfur diesel and the power trains that use it are expected to yield slightly fewer miles per gallon than current combinations, meaning operating costs will be higher. Equipment, tires and lubricating oil also cost more than last year. A tighter labor market is likely to mean carriers will have to pay higher wages and benefits to attract and retain drivers.
Until now, carriers have been able to pass along higher costs for fuel, equipment, and drivers, because demand for freight services was strong and trucking capacity was tight. But if economic growth slows, customers are going to be less willing to pay higher base rates or fuel surcharges.
The bottom line: Judging by the record level of orders for heavy trucks, it appears that trucking executives are convinced that demand for their services will remain strong well beyond the end of 2006. Most economists share the view that conditions will continue to be “just right.” But, despite the popularity of a recent book called The Wisdom of Crowds, sometimes the bears do show up unexpectedly.
