The manufacturing sector is continuing its slowing and growing trend but key factors within the sector indicate for-hire trucking will remain generally prosperous through the third quarter.
The Institute for Supply Management (ISM) recently announced that its index for manufacturing dipped 0.6 points to 53.8 in June. Any reading over 50 means the manufacturing sector is growing. Of particular interest to trucking in the ISM report is that manufacturer and customer inventories were too low, supplier deliveries were slowing for the 36th consecutive month, and order backlogs grew.
Generally, lean inventories through the supply chain equates to buzzing shipping and manufacturing activity to replenish stock—as evidenced by the growing backlogs. Slowing supplier deliveries implies that transportation networks are working at capacity, which gives truck carriers leverage on pricing.
In fact, ISM reported that one manufacturing respondent said, “Trucking is getting tighter, and we are spending a lot of time trying to find carriers to pick up loads in a timely manner.”
Although the manufacturing sector is showing some signs of cooling, this trend is expected given that the economy has recently reached unsustainably strong growth, according to Chris Brady, president of Commercial Motor Vehicle Consulting. For example, U.S. gross domestic product grew at a 5.6% annual rate in the first quarter, driven by a 5.1% boost in consumer spending. Consumer spending comprises about 70% of the total U.S. economy.
Contributing to the slowing growth trend of the U.S. economy is the steady interest rate hikes initiated by the Federal Reserve to keep a lid on inflation. Last week the Fed increased the central bank’s short-term interest rate target to 5.25% from 5%. The Fed indicated there continues to be considerable risk that inflation could force their hand to implement more rate hikes.
“The risk going forward is whether or not inflation is under control,” Brady told FleetOwner. “If it’s under control then we’ve probably seen the end of interest rate hikes. If [inflation is] gaining momentum than we’ll see further hikes, and as interest rates climb it will have a larger negative impact of the economy. For example, now the housing market is cooling off naturally, but further hikes would cause a slump.”
But interest rates generally take over a year to fully work their way through the economy, which doesn’t impact trucking’s outlook in the short-term, Brady said. “The real concern right now is more the medium-term in the sense of where the inflation outlook is going.”
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