Friday, December 29, 2017

How the "Trump Bump" Impacted Trucking

Note: This content first appeared in Global Trailer Magazine and was written for a foreign audience.  However, it does give a broad overview of the factors that have influenced commercial vehicle sales this year.

The unexpected election of Donald Trump has caused a great deal of political turmoil in the United States. However, the area of Trump’s biggest success has been the business sector, where a rejuvenated economy has boosted freight growth and commercial vehicle sales.

Although there have been few new laws passed, President Trump has been able to influence the economy in other ways. His impact, which is partially symbolic on the economy, trucking, and equipment purchases has been significant.

The Economy

A Shot of Confidence

Following the election, consumer and business confidence indexes spiked. Many of these measurements hit levels not achieved in many years, a couple reached all-time highs. Executives and citizens clearly expected a “businessman president” to be able to improve the economy.

However, business confidence surveys have been traditionally poor economic indicators because they measure attitude, not action (actually spending money). For this reason, many economists dismissed the indexes as a short-term emotional response. However, one of the factors stifling the U.S. economic recovery was fear. Many businesses barely survived the Great Recession and watched competitors go bankrupt. This caused companies to be extremely cautious about investing even years after the recession ended. Therefore, this increase is confidence factor did matter, but it took over half a year to have an impact. Although down from peak levels, most of the confidence indexes remain at elevated levels.

Regulations

The previous administration enacted and proposed numerous regulations upon business entities and industries, including trucking. It was perceived as an anti-business environment. Trump campaigned strongly against “over-regulation” and, in the first six months as president, cut or delayed over 800 regulations.

Gridlock

The U.S. Government is in a highly dysfunctional state. Although the Republicans hold the Senate, the House of Representatives, and the Presidency, they have not been able to pass any important legislation. This “government gridlock” has traditionally created a favorable business environment. U.S. companies desire the stable environment conditions when the government is idle. This leads to increased business investment, which creates jobs and economic growth.

Manufacturing

U.S. manufacturing growth also accelerated around mid-year. This was not primarily because of Trump, but of this business cycle. Manufacturing activity slumped late in 2016, impacting the freight and commercial equipment markets. It started to cycle back up early in 2017, but was boosted by the spike of confidence and regulatory rollback discussed previously.

Consumers

The consumer sector also has been growing all year. The unemployment rate is currently 4.1% (full employment is considered 4.0% due to transition factors). Although there are factors skewing this measurement, there are many more people working than several years ago. Wages have not risen as fast as expected and healthcare continues to eat up a chunk of disposable income, but consumers are spending at a healthy rate.

The Results

The U.S. economy grew at a 3.1% clip in Q2 and is expected to come in at around 3.0% for Q3. This is higher than most economists expected. It appears the spike in confidence after the election had an impact, but it took months before consumers and businesses actually opened their pocketbooks and began spending money. Of course, there are other factors in play, most notably the reemergence of the U.S. oil industry as the price of crude rises.
Interestingly, the biggest hindrance to future growth is lack of available workers. The reasons include:

- Structural Unemployment: Some available workers do not have the skills and training needed for the jobs being created.
- Cultural: Many younger workers prefer not to work in factories or in manual labor-type jobs.
- The Opioid Epidemic: A significant number of potential workers are addicted to pain medication (opioids) or cannot pass an employment drug test.
- Increased Safety Net: After the Great Recession, there were increased social welfare payments, then expanded health insurance benefits. This acts as a disincentive for some potential workers.
- Immigration Enforcement: Some undocumented workers left the country due to immigration laws being enforced.
- Demographics: The “Baby Boom” generation is retiring, and more workers are needed to replace them.

The Trucking Industry

A Much-Improved Business Climate
In March, just two months after Trump’s inauguration, 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 was a clear signal of a much friendlier business climate for the industry. The previous administration was perceived to view trucks as something that polluted the air and endangered the highways, and thus heavily regulated the industry.

Freight Growth Accelerates

Naturally, the improved U.S. economy, and especially manufacturing, generated significantly more freight. Freight growth was 2.9% in Q1 and has steadily accelerated throughout the year. Growth is forecast at an impressive 4.6% in Q4, which would bring the total year to 3.6%

Trucking Capacity

After years of slower, manageable growth, fleets struggled to increase capacity. FTR (Freight Transportation Research) estimates Class 8 truck utilization at 95%, much higher than the historical average (88%). Capacity utilization is expected to tighten over the next year, reaching as high as 97%. This has caused problems for shippers who are having problems finding trucks to make on-time deliveries.

Freight Rates

Freight rates have steadily risen as capacity has tightened. Loads and rates in the “spot market” (non-contract) have spiked as shippers seek carriers outside their normal channels to prevent late deliveries. Contract freight rates have not increased very much, but will when the new contracts are negotiated.

Regulations

The Trump administration did not revoke the requirement for Electronic Log Devices (ELDs), which becomes effective in December. This is because ELDs are a safety measure which ensures drivers follow the already established Hours-of-Service regulations. There has been an extension of when the ELD mandate will be enforced, however.

Most large fleets have already been using ELDs, however many small fleets are waiting until December to implement. History has shown ELD implementation can reduce a fleets productivity up to 10% in the short-term and then around 2-4% after that.

The regulations on trailers regarding the mandated use of glider equipment (tails and skirts) to improve fuel efficiency has been put on hold and is expected to be repealed. Other proposed regulations on trucking have been put under review. However, some safety-related ones may survive.

Driver Shortages

The increase in freight, the loss of productivity, and the retirement of aging drivers has created a high demand for new truck drivers. However, the tight labor market, discussed previously, and the undesirous nature of the job threatens to push the driver shortage to crisis levels. Some fleets already have brand-new trucks parked because they can’t find drivers for them.

Crunch Time

Combine the strong freight growth, productivity loss due to ELDs and a severe driver shortage, and the potential exists for an industry crisis early in 2018. It is difficult to predict the impact or the industry response to this unprecedented circumstance, but shipping disruptions will occur.

Commercial Equipment Markets

Class 8 Trucks

Class 8 truck sales weakened at the end of 2016, and some forecasters, though not FTR, expected the market to suffer a serious correction. However, after the uncertainty over the presidential elections faded and the surge in economic confidence occurred, sales came out of their tailspin and began a steady, moderate recovery. Overall, 2017 production will be decent (248,000 North America) with the second half build much higher than the first. The 2018 forecast is for 300,000, as the 2017 momentum is expected to roll into 2018, based on the factors listed previously.

Commercial Trailers

The North American commercial trailer market had another fantastic year. Production for 2017 is expected to come in at 315,000, a 2% increase from 2016. The trailer market has been uncharacteristically running ahead of the Class 8 market since the third quarter of 2016. This is because fleets were behind in their replacement cycles after the Great Recession. Many dry vans were parked for an extended period as the slow economic recovery continued. This disrupted trade cycles well into 2017.

Fleets are also buying more dry vans to compensate for reduced productivity due to regulations and the driver shortage. The use of drop-and-hook, dropping off one trailer and hooking up a different trailer, has become commonplace. Refrigerated vans and flatbeds also are increasingly doing this.
Refrigerated vans have benefited from a large increase of “temperature-controlled” freight such as pharmaceuticals, medicines, and chemical-sensitive products, etc. Consumer preferences for both fresh and frozen foods have also created more freight moves.

Flatbed (platform) trailers started a strong comeback in 2017. The growth of the industrial sector and the regeneration in the energy markets is creating more flatbed demand.

2018 Outlook

Next year should be more of the same for the North American commercial vehicle market. GDP is forecast at 2.9%. This could go even higher if tax reform is accomplished. Freight will continue to grow, just not at the robust pace of the last two quarters.

This should keep equipment demand vibrant next year. The North American Class 8 build is forecast to come in at 300,000 units, with trailers at 312,000 (down slightly from 2017).

The big concern is capacity constraints. Freight growth and reduced productivity mean more trucks and trailers will be needed. Where the drivers come from to operate the additional trucks is unknown. This does have the potential to crimp equipment purchases in the short-run. It will be interesting to see how this problem gets resolved.


Wednesday, December 13, 2017

Smooth Sailing But The Winds Are Calming

Note: This post originally appeared of the FTR blog in November.  Some of the economic indicators have been updated since then, however the conclusions and substance of the analysis  have not changed.
GDP has been above 3% for two straight quarters! Business people are giddy with excitement, as business conditions and confidence are at their highest level since the Great Recession. CEOs all the way down to factory workers are hopeful the economy has broken through seven years of the slow-growth recovery and will get even better in the future.
Early this year, the forward-looking economic indicators pointed to higher growth, or 3% GDP, for part of 2017. This combined with antidotal evidence from various industries was my basis for predicting higher economic growth this year. In this case, the view from the ground, talking with knowledgeable business people, was more accurate than the view from the air, the economists.
But where are we now? Are we headed higher or not? It’s time to revisit the indicators to see how 2018 will begin.
Leading Economic Indicators
The ECRI Weekly Leading Growth Index has been declining since peaking in February. It hit 0.8 in September. That was hurricane related, however, because it recovered to 3.2 in October. Similarly, the Conference Board Leading Economic Index has been slightly weaker than earlier this year, and the storms actually put it in negative (-0.2) territory in September.
Although these indicators have weakened, they are still giving positive readings. This is good news in that economic growth should continue into 2018. However, they are not forecasting stronger growth ahead, but a moderate slowdown.
Manufacturing
The ISM October PMI for manufacturing was a sturdy 58.7, down 2.1 percentage points from September. However, the forward-looking components of the index remain vibrant. The New Order number was at 63.4%, and backlogs remain solid at 55. In addition, customer inventories are regarded as too low.
Factory orders are growing again after flattening out in the summer. Data from the Philadelphia FED show manufacturing activity at a strong and steady rate for the past six months. Most commodity prices are much higher than a year ago.
This data indicates there is solid support for manufacturing activity in the short-term. It also says there is not impetus present which would push things much higher.
Housing
Building Permit data has been basically flat for the past year. The NAHB Builder Confidence Index remains elevated, but hasn’t changed much over the last 12 months. It appears housing with be neither a drag nor a boost to economic growth in 2018.
Business/Economic Confidence
The surveys from Gallup and Moody are still at positive values, just not at the high levels from earlier this year. This is not surprising since expected changes are moving much slower than people anticipated.
Consumers
Consumers are still consuming at favorable rates. Unemployment is low, and hiring is forecast to continue at steady. The Conference Board Help Wanted OnLine measure increased by 81,500 listings in October. However, my measurement of discretionary spending has been very flat since March. This indicates wages aren’t growing much beyond increases in expenses.
Transportation Equipment Market
Both the Class 8 and commercial trailer markets have slowed some after being robust through September. The pause was unexpected due to freight fundamentals remaining strong; however, it is consistent with the trends of the indicators detailed above. Both markets are expected to regain their momentum early in 2018.
Conclusion
Based on the indicators and data, it does not appear the economy can maintain its +3% growth rate in the medium-term. The good news is that even though the numbers have weakened some, they are still in positive territory.
Therefore, the economy should slow very modestly. It looks like we are still locked in a range where GDP increases moderately and then falls moderately. The difference now is that it is fluctuating at a somewhat higher range, peaks above 3%, than previously. So, it is good news, just not great news.
The Economists View

As a double check, the Wall Street Journal Economists Survey predicts a Q4 GDP of 2.8% and a 2018Q1 of 2.4%. The first quarter has been weaker than expected the last few years, so a drop to 2.4% seems reasonable. However, 12% of the respondents are forecasting a Q1 growth of over 3%.
The recent economic news (since this survey) has been very positive. The “bounce-back” from the hurricanes is providing an economic boost. Now 3% GDP in Q4 looks probable.

The Call
We will top 3% GDP in Q4 due to hurricane recovery and then drop below 3% in Q1. The economy should then resume it’s favorite “recovery” range between 2% to 3%. Of course, tax reform is the current wild card.