The hidden recovery

Avery Vise

October 13, 2013

If you read or listen to the news about the economy, the tone always seems to be one of nervousness, fear and fragility. And yet, if you look that the actual trends, the economy is doing quite well — at least in the ways that matter most to your business.

We start with one overarching premise: Your fortunes ultimately are linked to those of your customers. And if you put aside one admittedly huge issue — a lack of access to sufficient capital for fleet renewal — the fundamentals of the trucking business are strong.

Let’s look at manufacturing, which is most important to trucking because it generates more freight movements — from raw materials to parts and components to finished products — than any other. The key measures are all strong. For example, in August the Institute for Supply Management’s composite index of manufacturing activity known as the PMI was at its highest level in more than two years. Even better, the PMI components most directly related to freight — new orders and production — were especially strong.

You can’t rely on one index to analyze an entire sector of the economy, but other manufacturing indicators as strong as well. New orders for manufactured durable goods in June were at their highest levels ever, although they did dip in July largely due to a slump in commercial aircraft orders.

Retail sales, some of which are directly tied to manufacturing, represent another huge component of freight shipments and also are at record levels. While inflation does increase factory orders and retail sales, which are expressed in dollar volumes, inflation has been so low that it’s not a significant factor in these recoveries.

Sales alone won’t drive freight if businesses have plenty of inventories, but that’s not the case.

In July, The ratio of inventories to sales throughout the U.S. economy in July was at its lowest level since May 2012. As demand rises, therefore, sales should lead to an increase in truck movements.

Housing construction, another major driver of freight activity, continues to recover. True, housing starts and permits authorized for future construction have not matched their brisk pace from earlier this year, but they are much higher year over year and generally the best in more than five years. Meanwhile, sales of existing homes in August were at their highest level since February 2007.

There is a risk in softness in housing if mortgage interest rates continue to rise as they have done recently, but in the near term at least the effect seems to be the opposite. According to the National Association of Realtors, one reason for the surge of home sales in August was fear that interest rates might continue to rise, so buyers wanted to act quickly.

One reason to think that the housing recovery will continue is that employment levels continue to rise. True, the unemployment rate remains high, and that’s one reason for the perception that the economy is weak. But while the monthly job gains aren’t exciting, they are consistently in the right direction.

Based on comments on the August 2013 Randall-Reilly MarketPulse survey of for-hire trucking executives, business does seem good for trucking companies.

“There is plenty of freight to move if we only had enough drivers in seats to move it,” said one trucking executive. “Business levels are high across our customer base,” said another. “All indications are they will continue that way.”

That executive also said the lack of good drivers was the big issue and that the new hours-of-service rule is having an impact on service levels.”

The biggest weakness in the economy today isn’t really economic at all. It’s political.

The continued battles in Washington, D.C., have much to do with the anxiety and uncertainty businesses feel. While business owners view existing policies and regulations as hostile to their interests, the existing partisan makeup of the White House and Congress virtually guarantee gridlock.

Ultimately, it’s best to ignore Washington and act on the fundamentals.

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