The election of Donald Trump as POTUS brought a pronounced shift in strategy, tactics and actions regarding the U.S. economy. It’s almost as if President Trump is CEO of U.S.A. Corp and is managing the entire economy as a business entity. This has never been tried before and therefore the degree of economic uncertainty has greatly increased.
- Truck and trailer orders dipped before the election due to increased uncertainty about the outcome. This is common and the economy usually also slows down due to the same phenomenon. Smaller fleets and small businesses get particularly cautious. After the election fleets started ordering again, in volumes much higher than expected. Orders usually increase in October and stay elevated until December, as fleets place their requirements for the coming year. In 2016, orders for trucks and trailers did not spike until November (a direct result of the election), however orders have remained strong through March.
- The economic indicators are improving, including the key, forward-looking ones. It is important to note, so far this is the result of an economy on a natural upcycle and not the result of President Trump’s policies, which have not been implemented yet. Therefore, you should ignore the political rhetoric on this, both positive and negative, for a while). The economy is forecast to grow at a 2.4% clip for the first-half of the year, with potential upside based on the status of these positive indicators. Based on the delivery dates of the orders, trucking fleets are expecting a stronger freight market in the second half of this year.
- There is renewed economic confidence because, although the economy slumped some (1.6% GDP) in 2016, it did not go into recession and looks poised to resume growth. The monthly Class 8 truck build declined 54% from June 2015 to December 2016. Drops that steep almost always are connected to recessions, but not this time. Truck build has increased the last two months, and the jump in orders means the worst is over.
- Consumer and business confidence is soaring. Consumer confidence is at a 16-year high and small-business optimism at a 13-year high. The Obama administration was viewed largely as pro-regulation and anti-business by many companies. With a business magnate like Trump in charge, businesses are expecting positive changes. Consumers are feeling better because the election is over, the job market is improving, and the economy is doing better than in 2016.
The Future Could Be Good
- Some onerous regulations are being eliminated or delayed. Trucking was a favorite regulation target of the previous administration. It is expected that most pending, non-safety related regulations will either be delayed, changed, or eliminated. In addition, future greenhouse gas standards on trucks and trailers could be modified. Less regulation could lead to greater economic growth in the general economy.
- Tax reform could help small businesses, including many trucking fleets, that believe they are over-taxed. If fleets have more money to invest, this will help equipment sales and other sectors of the industry.
- Increased infrastructure spending helps trucking and the economy. The investment in roads and bridges will increase freight and improve truck traffic flow.
- Trucking is now viewed as a “favored” industry. It often appeared the previous administration viewed trucks as something that polluted the air and endangered the highways. On March 23, the president of the American Trucking Association, ten leading industry executives, and twelve truck drivers were Trump’s guests at The White House. They discussed issues affecting trucking. They also brought along a high-tech truck/trailer combination in which the President was photographed sitting in the driver’s seat. This would indicate there will be a much friendlier business climate for the industry.
The Future Could Be Bad
- NAFTA renegotiations could create problems. For the most part, NAFTA logistics has worked well for the benefit of the three countries involved. The optimal logistics routes and systems have been established and utilized. Some products cross borders multiple times before sale. Changes to this system, and unforeseen consequences, could disrupt supply chains and cause major issues and problems for the transportation industry.
- Trade agreements will be renegotiated with China and other countries creating the potential for multiple trade conflicts, and even trade wars, if negotiations turn sour. This would have a deleterious impact on the economy, exports, and freight.
- Interest rates will probably keep rising. Interest rates were kept artificially low for many years after the Great Recession. Now rates are gradually being increased. At some point this will discourage borrowing and put a crimp in economic growth.
- There is a great deal of uncertainty about the entire Trump presidency. There are master plans to bring manufacturing jobs back to America. There is a new strategy to deal with conflicts around the world. There is a new immigration policy. There is still a looming healthcare crisis to deal with. Missteps in any one of these areas could lead to an economic downturn.
What About the Economy?
- The economy was improving before Trump took office, so he is not responsible for what happens in Q1, and he probably won’t have much impact on Q2. So please ignore the press reports which over-dramatize this. Likewise, the impact of a “Trump Bump” on the U.S. Stock Market is also exaggerated. However, there is some positive impact to increasing consumer and business confidence on an economy already gaining steam, similar to giving a push to an object already in motion.
- Most economists don’t expect the economy to grow more than 2.5% in 2017. There is some upside potential if the confidence numbers turn into actual dollars spent. Most of Trump’s plans for job growth and reforms will take time to implement, meaning the impact would be in 2018 or later.
Other Industries Beyond Trucking
The transportation industry is not unique and is tied to almost all sectors of the economy is some way, so I would conclude that many factors impacting trucking and impacting other industries as well. The expectation of less regulations, lower taxes and a better business environment is boosting business confidence. However, this confidence is in future conditions, therefore the orders and investments placed today will need to yield rewards at some point.
FTR is forecasting Class 8 truck freight to grow by 2.9% in 2017. This is a healthy increase over the 1.3% growth rate for 2016. The freight forecast is consistent with the economic outlook above assuming the manufacturing sector continues to strengthen.
A moderately growing economy, generating modest freight growth, will support a basic replacement demand of trucks. Class 8 truck builds are forecast to increase 1.6% in 2017. Dry Van trailers had a robust year in 2016, as fleets are still replacing old trailers whose trade cycles were extended due to limited use during the Great Recession. Trailers production is expected to decrease around 7% in 2017, but still be historically strong. The mandate to use Electronic Logging Devices (ELD) which automatically record driver hours, is expected to decrease truck productivity and increase demand for new trucks (and some trailers) at the end of 2017 and into 2018. If this impact kicks in earlier than expected, 2017 demand will be higher.
Too Many Wild Cards
The biggest impact of the Trump presidency right now is a pronounced increase in uncertainty. It’s like playing a whole new card game for the first time and being dealt five wildcards. There are so many new factors in play which could have a significant impact (either way) on the economy and freightmarkets. If all of Trump’s economic plans work brilliantly, the economy would grow at rates not seen in years. Conversely, if Trump makes some big mistakes, the negative economic impact could be severe. Therefore, this is now an environment with a much higher upside and much deeper downside than before the election.