Assembling a strong base for freight
Industry fortunes are more tied to manufacturing than ever
Whether they admit or even realize it, most trucking executives probably expect the strength and duration of an economic recovery to match roughly the scope of the downturn. There’s certainly some logic in this way of thinking. An extended recession creates pent-up demand for consumer spending and business investment. Meanwhile, capacity tightens due to failures, consolidation and the inability to finance new equipment. Demand grows, supply falls. Happy days are here again.
Not exactly – at least not without volatility. The recovery likely won’t meet rosy expectations, and one reason for that is housing, says Noël Perry, principal of Transport Fundamentals and partner in transportation forecasting firm FTR Associates. In a CCJ webinar on the freight outlook last month, Perry said everyone must adjust to the reality that the boom housing market of 1995 through 2006 was significantly above the historical norm. The historical average homeownership rate is about 64 percent, Perry says. But the rate at its peak was 69 percent, and today it is still about 66.5 percent. So there’s still a ways to go toward a normal market.
During the housing boom, we were building about 500,000 more homes a year than the norm of 1.2 million, Perry says. During the bust, we probably will be building only about 700,000 at best until the market reaches equilibrium, which could take several years.
But housing isn’t the only construction-related negative, says Perry, pointing to the current political struggle over the deficit. If tax increases are off the table and several line items are sacred or untouchable – such as defense, Medicare/Medicaid, Social Security, pensions and interest on the debt – then we start off in a deficit even before we look at maintaining or increasing our spending on roads, bridges and other big construction projects. But if we don’t fix the problem, the result will be higher interest rates, inflation and another recession.
And yet, business is good for much of the trucking industry. That, according to Perry, results from manufacturing and tight capacity. “In the short term, the news is relatively good,” he says. One phenomenon has been a reversal of the longstanding trend of growth in services outpacing growth in manufacturing, Perry says.
All signs point to continued solid manufacturing growth. The Institute of Supply Management’s composite index, known as the PMI, has indicated growth every month since August 2009. The ratio of inventories to sales throughout the economy is at an all-time low. And durable goods orders remain strong.
Business investment and exports explain the strength in manufacturing, Perry says. In fact, even if foreign investors lose confidence in the United States and the value of the U.S. dollar drops, exports will be even more attractive.
The recovery may be volatile and brief, but credit manufacturing and the driver shortage for the profits you see.
– Avery Vise is executive director, trucking research and analysis for Randall-Reilly and senior editor, industry analysis for Commercial Carrier Journal. E-mail avise@rrpub.com.
