Economic picture still positive

Economic picture still positive

Conflicting economic data is making 2006 a tough year to call in terms of overall freight potential

Conflicting economic data is making 2006 a tough year to call in terms of overall freight potential.

On the one hand, growing investments by the business sector should help offset declines in consumer spending and housing construction.

Yet ballooning prices for oil, energy, and raw materials coupled with rising interest rates may drag down overall economic growth next year.

“Consumers are stepping aside and manufacturing and other business sectors are stepping in,” said Jim Paulsen, chief investment strategist of Wells Capital Management during Wells Fargo’s first-annual economic forecast teleconference.

“The U.S. business sector is looking very healthy, and this will help alleviate the slight slowdown in consumer spending and housing,” he said. “I believe we’re in the early stages of what will be considered a ‘manufacturing renaissance period’ in the next several years that’s tied to steady trade improvements. We’re also seeing renewed strength in the stock market, and foreign economic growth is accelerating, which further positions the U.S. economy for a more sustainable recovery.”

Yet Wells Fargo senior economist Scott Anderson warned that several issues could slow much of that potential economic growth. “A housing price slowdown, in part triggered by the Federal Reserve’s policy actions [increasing interest rates] could become more pronounced as the year 2006 progresses, placing consumer spending, credit-quality, and job creation at some risk,” he said.

“The challenges are mounting for U.S. consumers, restricting their ability to spend. Real earnings are being squeezed by the spike in inflation, job growth will remain subdued and energy prices elevated, home equity borrowing and wealth creation from the housing market will dry up,” added Anderson.

Ken Simonson, chief economist of the Associated General Contractors of America (AGC), said some business sectors may not fare well as prices increase - especially construction. “Inflation at the consumer level remained moderate last month, but many construction inputs are going through the proverbial roof,” he warned.

“While it is a relief to see that consumer prices, other than energy and food, are still rising only 0.1 or 0.2% per month, unfortunately, producer prices showed that nonresidential construction is being hit with a variety of steep price increases,” Simonson noted. “In addition, some materials are in short supply. I’m concerned that price spikes and supply shortages will continue in 2006.”

The worst news he said concerns diesel fuel. “The producer price index for diesel jumped 59% from October 2004 to October 2005 -- directly raising the cost of operating off-road equipment, dump trucks, concrete mixers, and other vehicles,” Simonson said. “And the truckers who deliver construction materials are passing through higher diesel costs in the form of fuel surcharges on most deliveries.”

Trucking is dealing with the twin issues of higher fuel costs and a lack of drivers, both contributing to a shortage of the capacity needed to haul any increase in freight tonnage.

American Trucking Association Chief Economist Bob Costello said that many carriers have increased capacity only marginally, if at all, so gains in tonnage are even more impressive than they may appear.

“It is difficult to increase volumes when you have the same number of trucks as a year ago, if not less,” Costello said. “The driver shortage is keeping a lid on capacity, which makes it difficult for motor carriers to increase tonnage significantly.”

Still, in the end, most economists expect the U.S. economy to keep growing in 2006, albeit at a slower pace.

“The economy’s current expansion turned four years old in November, and if recent expansions serve as any guide, it still has a long way to go,” said Diane Swonk, chief economist, Mesirow Financial. “However, real GDP [Gross Domestic Product] growth is expected to slacken over the year, ending at 3.4%.”

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