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Economy Still Sending Mixed Signals as Capacity Crunch Looms

Some economic indicators have not bounced back as well as others in the recovery from the Great Recession, but trucking is doing well, and a capacity crunch leads economic expert John Larkin to project truckload rates to rise 3 to 5% this year overall.

Larkin, managing director and transportation expert for investment firm Stifel, Nicolaus, offered an economic outlook Tuesday morning during the Truckload Carriers Association annual meeting in Kissimmee, Fla.

Extolling the virtues of his new business-friendly, red-state home of Texas, Larkin keynoted Tuesday’s general session, highlighting areas of the economy that are doing well, and some that are not doing so well.

The auto industry: “We have seen quite a good rebound to the previous high level seen back in the late ’90s, and that is a very good thing for America,” he said. He believes it’s a trend that will continue because the average age of the nation’s fleet has increased, leading to pent-up demand. “Hopefully not too many of the plants will be shifted south of the border,” he added.

Retail inventories: When inventories are low, they need to be replenished, which creates a lot of just-in-time transportation demand. The inventory-to-sales ratio has been declining pretty steadily over the past 20 years, he said, reaching a low in early 2012, but has been slowly increasing since then. “I don’t think that’s going to be very long term in nature and should begin to trend down a little bit.”

Manufacturing: The ISM Index, which indicates whether the manufacturing side of the economy is expanding, has averaged 52 over the past 30 years. A reading greater than 50 indicates expansion. Manufacturing saw a pretty strong recovery Larkin said, but has slowed a bit in the past couple of months, with the most recent reading at 52.9 for February.

Unemployment: The overall unemployment number you hear in the mainstream media can be misleading, Larkin said. When you look at labor force participation, he said, it’s “distressing” that after peaking in 1999 or 2000 at about 67 percent of age-appropriate individuals in the workforce or willing to work has dropped by about 430 basis points, mostly in the past six years or so. Larkin blamed it partly on “the great social welfare net.”

On the other hand, he noted that the number of underemployed – people working part-time jobs who really want to work full time, or college graduates working jobs that don’t require a degree – “has dropped from 17% down to 11%, but 11 percent is still way to high.”

Many of the jobs being created are low paying or part time. “During the recession, of the jobs that were lost, about 22% were low paying jobs,” Larkin explained. “About 44% of the jobs created since then are low paying or part time jobs. We replaced good paying jobs with low paying, no benefit jobs and this has led to elimination of much of the middle class.

“You’re either a professional or you’re cleaning hotel rooms,” he said, noting that the fields with the most job growth sine 2008 are healthcare and the leisure and hospitality industry.

Retail sales: About two-thirds of the economy is defined by the consumer. This number ha rebounded to where it was about 10 years ago – but that doesn’t account for the fact that the population has increased, so on a per-capita basis we’re still not where we were.

Consumer sentiment: Nevertheless, a longtime survey by the University of Michigan shows “people are feeling good about lower gasoline prices, feeling pretty good about their lot in life, but we’re still way below the peak back in the late ’90s and early aughts.”

Housing starts: The drop from peak to recession trough was a dramatic 79%, Larkin said. “We’ve seen a partial rebound but we’re not anywhere near where we need to be.” Part of the reason for that, he said, is the formation of new households is only about half of what you traditionally would have expected based on the size of the population, as Millennials move back in with their parent after college and put off getting married and starting families of their own. “So marriage is kind of out of vogue and I would argue marriage drives consumption,” Larkin said.

“The truckload industry in terms of wallet share is still about 75% of the U.S. transportation market, so it’s the most important piece of the puzzle,” Larkin said. “No, intermodal is not going to put it all on the rail.”

He did not that dry van load volume dropped off precipitously during the recession and really hasn’t recovered. He credited the growth in intermodal, a more digitalized economy, the growth in the service economy, etc. (Tanks and flatbeds have recovered more than dry van freight, he noted.)

However, truckload rates will continue to rise, Larkin said, predicting “the mother of all capacity shortages will appear during the 2017 to 2019 time frame, when all those regulations go into effect and customers will have to pay up more dearly for your services.”

Truckload rates, he said, “we think will continue to rise because shippers are quite aware of the supply shortage out there. We predict 3 to 5% this year overall. Of course, individual fleets can increase that by choosing the better paying freight and turning away customers that won’t work with you to get the kind of utilization on your assets that’s desired.”

The capacity crunch means better rates for fleets, but a lack of capacity could constrain the growth potential of the country’s economy, Larkin said. “That’s kind of a worrisome problem that could lead to more free thinking on the part of Congress and open up some possibilities for more productivity — perhaps getting more young driver trainees into the system before they turn 21,” he said, or making changes in size and weight regulations.

“It’s our view that the future looks very bright, provided governments get out of the way and let us do our jobs.”

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