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The Economic Climate For Trucking Looks Better Than Ever

Though the news may get lost in the daily spin-cycle of national television coverage, it is no secret to those within the trucking industry: The U.S. economy is charging hard and the impact it is having on the freight sector cannot be understated. Economic winds are prevailing and trucking companies stand to gain. Will the rising tide lift all boats? For motor carriers who are prepared for the economic windfall, they certainly will.

Consider this: U.S. gross domestic product has expanded 29% over the past year. While it is a given that such growth will be hard to sustain, we are still far away from a contraction. Economists rightly point out that we are currently amid the second-largest economic expansion in U.S. history. Economic growth for 2018 is expected to ring in at 3% for the year, with the first quarter of 2019 expected to possibly hit 4%. From the April – June period, the economy clocked an impressive 4.2% gain. Further along in the year, it is expected the number will drop to 2%. Still, this kind of growth is quite impressive.

By 2020, the economy should moderate out a little, setting a specific trendline for future growth until there is another contraction. Within a couple of years, this moderate and steady growth period should provide a sense of equilibrium to industries and sectors that are currently feeling the heat of what seems like never ending growth.

While the economy may settle down over the next few years, provided there is no major shock to the system, we are still a way from a true-blue economic downturn. Even if there were a major problem, such as a terrorist attack, that hits GDP by 2%, that still leaves room for continued growth and expansion. With a record expansion currently underway, there seems to be balance within the system.

Trucking is Feeling the Growth

If there was one surefire way to gauge how well the economy is doing, it is within the strength of orders for commercial motor vehicles, associated accessories and trailers. The transportation sector is seeing a huge surge in growth, one which does not appear to be letting up any time soon. If economic growth continues at its current trendline, there will be very little breathing room for transportation companies, shippers, receivers, and OEMs.

With Class 8 tractor orders at historically high levels, OEMs are doing everything they can to keep up with the growth. In fact, four of the top five order months ever have occurred in 2018. The post-recession average logged from 2011 – 2017 has so far been far eclipsed by truck orders in 2018 alone.

Interestingly, retail sales are barely tracking the level they were at in 2015, yet truck orders are far higher than they were in 2015. So, what’s with the disconnect? The supply chain has been stretched to its max. Supplier issues have led to a bottleneck in the supply chain, leading to a situation where trucks simply cannot be built fast enough to meet the demand.

Fortunately, the past few months have seen suppliers ramping up their production to meet increased demand. The shortage has gone from a severe situation to a very bad situation. We have a way to go before we get from bad to good, but there is some light at the end of the supply chain tunnel.

Yet, now that the industry is starting to clear away the bottleneck, the new, familiar problem rears its ugly head: There simply are not enough truck drivers to occupy the cabs that are being produced at breakneck speed. The trucking industry just can’t seem to get a break.

Production Issues Abound

Beyond the well-known lack of truck drivers to haul the freight, there are some major production issues hobbling the sector. As orders fill up, it is likely that many OEMs will run out of production capacity. Even so, expect the numbers to ring in a record year for the industry. It is estimated that Class 8 production is going to round out at 340,000 units for 2018. In 2020, those numbers are expected to drop to 280,000, then the leveling out will happen, ending up at an average of around 250,000 units through 2022.

Trailers are also feeling the heat. The trailer build for 2018 is expected to come in at over 310,000 units. Consider this: That represents an 85,000-unit increase over trailer builds in 2016. With higher GDP growth, industrial production, and truck loadings continue to grow, trailers are right behind. Yet, trailers are also dealing with their own production growth problems.

Supply-chain disruptions hit trailers in the first half of 2018, as the last two quarters of 2017 showed a massive increase in demand for trailer production. The problem with trailer production was the same problem as was seen with tractor production: Supply issues, highlighted by the shrinking employment situation.

It isn’t just truck drivers who are missing. With unemployment at historically low levels, suppliers and businesses across the supply chain are finding it increasingly difficult to find workers. With wages increasing and more workers “shopping around,” there is an employment squeeze across just about every sector of the American economy.

Higher Prices on the Horizon?

Some within the industry are wondering when all of this is going to equal higher prices. Indeed, inflation has remained relatively tame when compared to the higher economic activity. Yet risk factors remain, both on the domestic and geopolitical front. While some of these risk factors may not be directly associated with trucking, they still carry potential to negatively impact the industry.

Political uncertainty related to U.S. isolationism and trade wars represents the biggest potential pitfall. With fresh rounds of tariffs going back-and-forth between the Trump administration and China, it really is anyone’s guess how this will impact prices in the short-term. In the long-term, many economists expect the current trade environment to have a lasting impact on the U.S. economy.

In addition to the dispute with China, the renegotiation of NAFTA represents another potential concern. While the administration has reached a deal with Mexico on the 25-year-old trade deal, Canada is still a holdout. Talks are ongoing, but it is still anyone’s guess as to how this will play out in the real economy.

Wage inflation continues to be another concern, though a major increase in this statistic does not seem to yet be born out in the numbers. There are still more jobs now than people looking for them, although those numbers appear to be starting to reach equilibrium. Some economists are expecting inflation to tick up – followed by interest rate hikes – in 2019. Especially considering the increased freight costs companies are now grappling with.

With the trucking industry seeing the best economic climate since deregulation, strong growth is expected to continue. It should be no surprise then that spot and contract rates are showing continued growth. Strong increases bode well for the trucking industry.

Should Interest Rates be a Concern?

Some are speculating that the breakneck U.S. employment situation is going to lead to higher interest rates. Indeed, logic dictates as higher interest rates are the primary tool the Federal Reserve uses to keep a lid on an overheating economy. The question is: How will a higher rate environment impact the trucking industry?

Fortunately, many transportation sector economists feel there is little to worry about. Interest rates have been at historically low levels for nearly a decade, so any additional increases should result in a normalization of rates, rather than a massive increase that could lead to industry disruption.

There is another potential benefit for transportation companies where a higher rate environment is concerned. In the near-term, higher interest rates provide a shot in the arm to the economy for the simple reason that banks are more likely to lend more when they are getting a bigger return on their lending. Higher interest rates provide just that environment.

Simply put, there are other areas that impact trucking more than interest rates. Those include:

  • Consumer spending
  • Construction
  • Factory output
  • Inventory levels

The fact that all four of these indicators are doing well at the same time bodes well for the industry. Rarely are all these indicators chugging away at full speed at the same time. A deeper look at each indicator shows that there is strength in each.

It is estimated wages will grow by an additional 3% in the final quarter of the year, resulting in increased consumer spending. As for construction, it is estimated that there could be 1.3 million new homes built in 2018. Factory output is also up 1.7% over the 2017 reading. With inventory-to-sales ratios also looking favorable, the trucking industry still has plenty of freight to send around the country. Inventories are simply no longer a drag on trucking movements.

With all the economic headwinds painting a rosy picture for 2018, the outlook for 2019 remains unclear. Will we see global concerns and domestic policy put a damper on future growth? Furthermore, how will the employment situation shake out across sectors? Right now, the answers to those questions remain anyone’s guess.

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