Inflation, rate hikes may nip tonnage growth

Inflation, rate hikes may nip tonnage growth

Housing start, consumer spending and manufacturing driving freight but inflation may stunt growth in the future

The latest round of economic reports indicate there is still momentum within the manufacturing sector, the housing industry and consumer spending—positive indicators that freight growth will continue in 2005. But the Federal Reserve Board has indicated that inflation may accelerate, a clear signal that rising interest rates will be used to put the brakes on economic growth.

In a recent release that accompanied the Fed’s approval of another quarter-point increase to the federal funds rate to 2.75%, the board noted that the economy has yet to see the full impact from rising energy prices.

“Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident,” stated the Fed. “The rise in energy prices, however, has not notably fed through to core consumer prices.”

But the rate hikes have yet to discourage homebuyers much, as home purchasing continued to expand last month. Housing starts in February were at a seasonally adjusted annual rate of 2.2 million, a 0.5% increase over the revised January estimate, the U.S. Census Bureau said. This marks a 15.8% leap over February 2004.

“Anything above 2 million is very strong number,” analyst Chris Brady, president of Commercial Motor Vehicle Consulting told Fleet Owner, adding that it typically takes six to nine months before rate hikes on federal funds start to slow the economy. “That’s a stimulus for building materials. And once houses are completed, that stimulates furniture, appliances and fixture purchases.”

Inflation continued to dog consumers, who have the largest impact on the economy, as prices took a 0.4% hike in February, driven largely by the 2% jump in energy prices, the U.S. Census Bureau said. However, consumers continued to shrug off inflation as retail sales expanded 0.5% in the same month, according to the Bureau of Labor Statistics. Excluding automobile sales, which are volatile on a month-to-month basis, consumer spending expanded 0.4%.

“There’s definitely more risk of inflation, but in the months ahead it won’t have an impact on freight volumes,” Brady said. “Further down the road it will have a relatively large impact, as it would slow growth in consumer spending.”

The manufacturing sector, trucking’s largest customer, continued to show robust growth as backlogged orders in February increased 0.6% over the previous month. This marks a record high since the Census Bureau began its NAICS methodology to collect data in 1992, and ensures there is more freight coming down the pipe.

Because of upward trends in consumer spending, manufacturing and housing, the tonnage outlook continues to indicate decelerating growth. Inflation and interest rates will continue to tug on the economy and possibly make a bigger impact in 2006, Brady said.

“The trucking environment is good and the market should be fabulous; freight is growing, and capacity is tight,” Brady said. “Even though their biggest expense, driver wages, and their second largest expense, fuel, continue to rise, the good thing is that they’re able to pass those along to customers.”

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