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Economy sputtering forward bodes well for freight

Nov. 4, 2009
Increased manufacturing activity and more “re-balancing” of inventories are two of the latest signs that the U.S. economy is improving and that freight volumes should rise. Yet experts caution that trucking is not out of the woods yet

Increased manufacturing activity and more “re-balancing” of inventories are two of the latest signs that the U.S. economy is improving and that freight volumes should rise. Yet experts caution that trucking is not out of the woods yet.

“The manufacturing sector grew for the third consecutive month in October, and the rate of growth is the highest since April 2006,” said Norbert Ore, chairman of the Institute for Supply Management’s (ISM) manufacturing business survey committee.

He added that ISM’s monthly purchasing managers’ index (PMI) rose to 55.7 in October, an increase of 3.1 percentage points from September, and that any value over 50 indicates growth.

“The jump in the index was driven by production and employment, with both registering significant gain,” Ore said. “Production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers. Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode.”

Yet he cautioned that those numbers may be a bit too high, and will likely drop a few points next month in what he called “a leveling off” on the economy's course toward recovery. “This is not a robust economy,” Ore stressed.

ISM’s data also indicates that customer inventories overall contracted by 0.5% between September and October to 38.5%, which the group noted is too low a level. That, in turn, means inventories would need to be replenished and that is a key factor driving demand for freight transportation, noted Eric Starks, president of research firm FTR Associates.

“That data does verify that things are improving – that the manufacturing sector is headed in the right direction and that we’re approaching a better inventory-to-sales ratio,” he told FleetOwner. “With the PMI up above the 50 threshold for three months in a row, that is good.”

Still, there will be problems to contend with for the next few months, stressed Chris Kuehl, chief economic analyst with the National Association of Credit Management (NACM). “In many ways, the best way to characterize the situation is to say that the beatings on the economy have stopped, but that every bone has been broken,” he explained. “The recovery started slowly in the last few months and will continue to progress slowly and not without some reversals from time to time.”

Yet news from the last few days of October has been especially solid with the third quarter gross domestic product [GDP] numbers stronger than anticipated, Kuehl added – 3.5% growth after four quarters in the negative category. Even more significant from the perspective of credit availability is that the NACM’s own Credit Managers’ Index (CMI) broke past the 50 neutral barrier for the first time in over a year, he said.

“The manufacturing sector finally crested the 50 mark this month, a long-awaited development and one that is consistent with other economic data coming from the industrial community as a whole,” he said. “After falling just short of the growth mark in September at 49.6, manufacturing numbers are now past the neutral zone and are standing at 51.2. This is a pretty sharp gain given the slow development over the last several months. While it took from July to September to move 1.3 points, it only took one month for the sector to move 1.6 points to reach October’s numbers. This is rapid expansion by any measure.”

Kuehl said the significance of these findings is hard to overestimate given the kind of analysis taking place around the improved GDP numbers.

“The dominant theme is that four factors were at work with third quarter GDP: the impact of the stimulus package, the ‘Cash for Clunkers’ program, the $8,000 new home-buyer credit and the Federal Reserve keeping interest rates low,” he explained. “These are all important factors, but are not the only ones at work—the CMI data makes this pretty clear. The private sector is also engaging in this economic comeback with the CMI tracking this activity in both the service and manufacturing sectors.”

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