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A brighter big picture

Oct. 6, 2014
Though overall growth is expected average out on the slow slide for 2014, the outlook for the U.S. economy – and by extension for freight – continues to noticeably brighten.

Though overall growth is expected average out on the slow slide for 2014, the outlook for the U.S. economy – and by extension for freight – continues to noticeably brighten.

Take for example the results gleaned from Deloitte LLP’s most recent CFO Signals survey, which tracks the thinking and actions of more than 100 chief financial officers (CFOs) from very large North American companies.

For the third quarter, Deloitte found that 43.7% of CFOs polled expressed improving optimism, relatively unchanged from last quarter. However, only 11.7% expressed declining optimism – the lowest proportion since the survey began in 2010. Overall, net optimism increased quarter-on-quarter from 25.7% to 32%, the firm said.

"There is a clear shift to a more positive outlook this quarter as well as a level of optimism not seen in recent years," noted Sanford Cockrell III (seen at right), a national managing partner at Deloitte LLP and leader of the Deloitte CFO Program. "While familiar risks remain on the radar, sentiment has ticked up from previous quarters."

He added that this improved level of optimism is reflected in increases to CFO expectations regarding key performance metrics:

  • Year-over-year expectations for sales growth increased to 6.8%, the highest level recorded for three years and the third consecutive quarterly increase from a survey low of 4.1% at the end of 2013.
  • Earnings expectations also increased, from 8.9% in the second quarter to 10.9% now; the highest level recorded since the first quarter of 2013. In total, 90% of CFOs polled by Deloitte expect year-over-year gains in earnings, the highest proportion in the survey's history.
  • Hiring expectations hit a five quarter high of 2.3%, a rise from 1.6% in the second quarter, though hiring forecasts by U.S. CFOs were not as positive as their Canadian and Mexican counterparts, rising only from 1.4% to 1.7%.

However, CFOs still remain wary regarding several risk points, particularly over equity market valuations, the European economy, political interference, economic and financial risks, plus concerns over U.S. government tax policy. The key “worry points” according to Deloitte’s survey are:

  • Sentiment regarding performance of the European and North American economies one year from now fell for the second consecutive quarter – though, overall, CFOs continue to believe the North American economy will be better, not worse, one year from now. 
  • Some 63% of CFOs continue to believe that U.S. equity markets are overvalued while 47% believe external financial and economic risks are higher than normal.
  • Concern over government tax policy and reform reflects a wider concern regarding U.S. regulatory efforts, with 65% of CFOs expecting moderate or high disruption to their business from government regulations.
One key metric that did not witness an increase this quarter revolved around the CFO forecast for capital spending growth. Year-over-year expectations declined to 5% – a decrease from 6.8% in the second quarter and the lowest level since the third quarter of 2013 – and fell even more in the U.S. to 3.5%, which is an all-time survey low.

Greg Dickinson (at right), a director Deloitte LLP who leads the North American CFO Signals survey, added that those declining capital spending figures – which potentially involve a lot of freight movements – are part of what he called a “long-term decline” in such forecasts since the survey began in 2010.

Forecasts were typically close to 12% in the first quarter of each year between 2010 and 2012 but have declined markedly since then, he pointed out.

"We may be seeing signs of a new, lower normal for capital spending levels," Dickinson noted. "Some organizations may have developed excess capacity during the recovery, while others may now be less reliant on hard assets for growth – and more reliant on digital technologies that scale relatively inexpensively. And we may be seeing some companies exchanging company-owned assets for outsourced services."

The interesting thing is, though, is that Deloitte’s survey data on the capital spending point conflicts to a degree with the information complied by other groups, such as the Equipment Leasing & Finance Foundation (ELFF).

That group concluded that Investment in equipment and software is expected to grow 5.5% overall in 2014, according to the fourth quarter update to its 2014 Equipment Leasing & Finance U.S. Economic Outlook.

William Sutton – seen at left, who serves as president of the Foundation as well as president and CEO of the Equipment Leasing and Finance Association (ELFA) – noted in a statement that the group revised its 2014 equipment and software investment forecast upward from the 2.6% it previously predicted.

That's due to the gradually strengthening U.S. economy -- with growth domestic product or GDP growth expected to top out at 2.2% for the nation as a whole in 2014 -- and continued replacement demand, he pointed out.

“The Foundation’s outlook forecasts that steadily improving economic conditions point to increased investment and financing activity through the end of the year,” Sutton said.

“Industry confidence has remained consistently positive and capital spending is up, as recent data from the Foundation’s Monthly Confidence Index and ELFA’s Monthly Leasing and Finance Index reflect,” he added. “Although challenges remain—from geopolitical risks to global growth concerns—we remain optimistic regarding the outlook for the equipment finance sector through the end of 2014.”

In particular, investment in commercial trucks is expected to exhibit modest growth through the year, he said, reflecting improved U.S. economic conditions.

That’s backed up by recent figures released by research firm FTR Transportation Intelligence, whose most recent preliminary data shows that North American Class 8 truck net orders totaled 24,477 units last month – the best September since 2005 and 27% versus the same month in 2013.

September is just the latest month to show year-over-year improvement, now at twenty consecutive months, added Don Ake, FTR’s VP of commercial vehicles, with Class 8 orders for the latest six month period through September annualized to 310,000 units.

“September Class 8 orders were similar to August and may reflect some pull ahead of fourth quarter orders in response to OEM production constraints as fleets attempt to reserve build slots,” Ake noted.

“If some of the September activity indeed is pull ahead, fourth quarter orders will be below expectations for the time period,” he stressed. “However, Class 8 orders overall are solid across the board and in line with FTR forecasts. We enter the fourth quarter with positive momentum, which means the first quarter build numbers should be robust.”

Taken together, that’s definitely a collection of positive news for the freight industry to ponder.

About the Author

Sean Kilcarr 1 | Senior Editor

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