Stronger-than-expected industrial production in the fourth quarter of last year, coupled with a continued decline in inventory levels, is improving the outlook for freight volumes in the first quarter of 2010 and for the full year ahead. However, motor carriers are cautioned to expect a very slow pickup in demand.
“Everything is living up to the way we expected [the U.S. economy to recover] so far, but the one wild card now is that there may be more robust growth in the first half of 2010,” Eric Starks, president of research firm FTR associates, told FleetOwner. “A lot of things are happening now that haven’t happened before.”
Starks said industrial production increased 7% in the fourth quarter of last year after increasing 6.5% in the third quarter; something most economists didn’t expect. That 6.5% increase was really good, but we thought it was almost all automotive related and couldn’t continue – but it did,” he said. “So the fourth quarter numbers looked really, really good and that’s a big positive sign heading into 2010.”
Indeed, according to the Institute for Supply Management (ISM), U.S. economic activity in the manufacturing sector expanded in December for the fifth consecutive month-- and the overall economy grew for the eighth consecutive month.
“The PMI [Purchasing Managers’ Index] rose to 55.9%, 2.3 percentage points higher when compared to November’s reading of 53.6%, indicating continuing recovery in the sector at a faster rate of growth,” said ISM president Norbert Ore. “It’s also the highest reading since April 2006 when it registered 56%.
“The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (46.3 %) corresponds to a 1.6% increase in real gross domestic product (GDP),” Ore continued. “However, if the PMI for December (55.9%) is annualized, it corresponds to a 4.6%t increase in real GDP annually."
Manufacturers’ inventories continued to contract as well, albeit at a slower pace in December, as the Inventories Index registered 43.4%, Ore said. The index is 2.1 percentage points higher than the November reading of 41.3%. However, an Inventories Index greater than 42.6%, over time, is generally consistent with expansion.
“Customers’ inventories have been ‘too low’ for nine consecutive months, and this month’s index is the lowest reading since the inception of the index in January 1997,” he added. “Overall, the recovery in manufacturing is continuing, but there are still some industries mired in the downturn as evidenced by the seven industries still in decline.”
“Leading indicators such as expedited freight demand, seasonal year-end freight trends, and continued lean inventories set up a positive backdrop for 2010,” said Jon Langenfeld, a transportation and logistics analysts with investment firm Robert W. Baird & Co.
“Inventory levels and end-market demand has begun to normalize, enabling shippers and carriers to look to 2010 with greater confidence than 12 months ago,” he added. “Consensus estimates reflect industrial production growth of roughly 4% in 2010, which implies a roughly 2.5% domestic freight growth. The range of consensus estimates for 2010 industrial production growth is 2.3% to 5.8%, which implies a range of freight growth of 1% to 4%.”
Baird is projecting freight growth for truckers of 2% to 3% this year, with intermodal volumes up 3% to 5%. Freight rates for truckers should also rise as well, but not by much, according to Baird’s numbers: about 1% to 3% for truckload carriers, but zero to 2% for LTL fleets.
“Though industry conditions remain challenging and the timing of a sustained economic recovery remains unclear, we are encouraged,” Langenfeld added. “We expect modestly improving demand trends to continue into early 2010, potentially setting the stage for stronger second half growth.”