BLOOMINGTON, Ind. — If you’re having trouble figuring out how to interpret the inconsistent and unusual economic indicators you’re seeing, take heart, even economists are struggling with it.
Noel Perry, senior transportation expert with industry forecaster FTR, says many economists have been waiting for the US to break out of its slow growth recovery and return to steadier growth of 3-3.2%, but it’s just not happening.
“The economics community is having difficulty accepting it,” Perry said of a US GDP growth rate that’s been just over 2% in recent quarters. “Everybody thinks we’re about to jump out of what they think to be abnormal growth, back into normal growth. It hasn’t happened and I don’t think it’s going to happen.”
FTR is projecting US GDP growth of 2.4% in 2016, just slightly better than current levels. However, Perry is quick to add, “Our forecast is very optimistic.”
A record crowd tuned in for this week’s FTR State of Freight Webinar. Perry warned them of several risks on the horizon, including the chance of a global recession.
“Our economy is inextricably linked up to the world economy,” Perry said. “The biggest extreme downside risk is the chance of a global recession.”
He noted countries such as Spain, Brazil and Argentina are already in recession and China’s manufacturing economy is as well. China’s stock market is down about 40%, which Perry said is a “canary in the coalmine.”
“There’s a real chance of troubles in the global economy and we think there’s about a 15-20% chance those troubles could be severe enough in the year 2016 that they could lead to the beginning of substantial economic troubles for us sometime later in the year,” Perry warned.
While the US economy has chugged ahead thanks to consumer spending, industrial production – a major contributor to truck freight – has been weak, Perry pointed out.
So far through the recovery, trucking’s growth has outpaced that of general GDP by a greater margin than in the past, Perry said. If that changes, it could be bad news for trucking. Still, FTR is projecting freight growth of around 3% in 2016.
FTR continues to warn of the effect regulatory drag could have on capacity in 2017 and beyond. If capacity utilization crosses the 100% threshold – and it’s expected to in 2018 when the impact of productivity-choking regulations are felt – the trucking industry will struggle to find enough drivers to move freight.
“We’re already hiring a million people a year and if you ask us to hire another 100,000, we can’t keep up,” Perry said.
Currently, capacity utilization is at about 95%, resulting in a soft pricing environment, though Perry said some forward-thinking shippers are accepting rate increases and locking in capacity in advance of the coming capacity crunch.
When it comes to fuel prices, people should pay attention to Perry. He declared in 2014, the same year crude was worth more than $100 a barrel, that the “energy crisis is over” for a while.
“When I say a while, I mean as long as I’m going to live on this earth and I intend to live for another 30 years,” Perry said then.
He reiterated that stance this week, but did warn diesel prices should start rising this year and fleets better be prepared. Showing how diesel prices track in relation to crude, diesel prices in the US have actually fallen more than they should have versus crude. As this relationship normalizes, coupled with an expected increase in crude oil prices, diesel could be in for a considerable hike later in 2016, Perry warned.
If the price of crude doubles from current levels to about $60 per barrel (typically the break-even point of producing it), then diesel will rise about 25%, Perry explained.
“And 25% on $2.25 is almost a buck,” he pointed out. “We know it will occur, we don’t know quite when. Plan for it to occur in the second half of 2016.”
When fuel prices rise suddenly, trucking bankruptcies occur, Perry said, because there’s a lag between when fleets are paying for fuel and when they can recover increases via the fuel surcharge.
“When (diesel) prices are falling like they have been over the past year, people get a nice infusion in cash. When prices rise, the opposite happens,” Perry reasoned. “This affects owner/operators and the big guys; it may affect the owner/operators a little bit more because they’re less able to manage those kinds of things.”
Rising fuel prices will also affect fleet profitability.
Asked if this is a good time to be entering the trucking industry or investing in new equipment, Perry said it depends on a carrier’s situation. It’s a great time to replace aging equipment, he noted, but he cautioned against adding capacity.
“This is not a good time to enter the marketplace, there are big exposures in terms of downturns in demand and also in fuel,” he said. “I would be hesitant as a trucker in any segment of business to be putting out big hunks of capital right now, with one exception. In times of good cash flow, right now is a good time to young-up your fleet. Get rid of the last 10% of dogs you have that drivers don’t like and that have high maintenance costs. This is a great time to be buying equipment because it will make your cash flow position very strong if the market does weaken over the next two to three years. But I would not be putting any speculative capital for growth into this business for a while.”
James Menzies is editor of Truck News magazine. He has been covering the Canadian trucking industry for more than 15 years and holds a CDL. Reach him at firstname.lastname@example.org or follow him on Twitter at @JamesMenzies. All posts by James Menzies