ATA chief economist offers up take on state of general economy

The notions of “green shoots” or “cautious optimism” in gauging the current state of the economy does not specifically exhibit what is really happening, when assessing how things are actually going, it seems.

That was made clear by Bob Costello, chief economist at the American Trucking Associations, at last week’s NASSTRAC (National Shippers Strategic Transportation Council) Shippers Conference and Transportation Expo in Orlando, Fla. last week.

“The economy is not as good or bad as it seems,” Costello told the audience. “There are three-and-a half-things driving the economy: the consumer, factory output, housing starts, and the inventory cycle.”

Consumers, he explained, are what always truly drives freight volumes, with housing starts typically seeing ups and downs, with the current market having come a long way off of the bottom. But factory output remains soft and continues to be an economic laggard, due to things like high inventories and the dollar appreciating as a rapid pace, which had a negative impact on factory output and exports.

As for the former, Costello said there are times when the inventory cycle has no impact on trucking and freight transportation volumes, but that is not currently the case today, explaining that inventories are having an overriding impact on freight volumes today.

Back in 2014, he explained, the inventory outlook was much different than now, with spot market and freight activity brisk, which saw a fair amount of truckload freight shift over to the LTL side, coupled with capacity being so tight, it was difficult to secure trucks. But at the end of 2014, he said shippers indicated they could not have that situation recur, and felt they needed to increase inventory to build up a cushion. On top of that, the freight transportation sector was dealing with the West Coast Labor situation and sluggish GDP growth, which led to way too much inventory on hand that needs to come down.

“This is what is impacting freight volumes the most today, with the inventory-to-sales ratio going up,” he said. “When it starts to fall…things will start to feel a little bit better for trucking fleets. But if it were to fall to low, there could be a situation where capacity gets so tight there is not enough cushion in the system.”

Even with manufacturing somewhat down at the moment, Costello said he remains bullish on its prospects for future growth.

“This industry has done so much in the last decade to remain competitive in a [global] market,” he said. “It has gone in and upgraded assembly lines that have greatly aided the production process, but people misread the manufacturing tea leaves, pointing to lower manufacturing employment numbers. But what was happening in the U.S. was the sector substituting capital for labor, because is could not remain competitive with China and India based on wages…so they had to get more productive. Longer-term, I am very bullish on North American factory output.

Addressing energy production, Costello explained that the U.S. still is producing a lot of energy, but in trucking it is not the actual production of energy that counts, it is all of the new frack and well drilling that drives so much truck freight, which has come to a stop, and has subsequently led to very little freight movement in the energy sector today.

These things are occurring against the backdrop of sub 2 percent GDP growth over the last five quarters, with Costello, expecting 2016 GDP to come in at around 2 percent, based on projections of 2.4 percent for the second quarter, 2.7 percent for the third quarter, and 2.8 percent for the fourth quarter.

Once the current inventory cycle is worked through, coupled with the cessation of the strong dollar, he said GDP could be around 2.4 percent-to-2.5 percent in 2017.

“This is a very mature economy,” said Costello. “If you are sitting around waiting for 3.5 percent growth, don’t hold your breath, because it is not going to happen on a sustained annual basis, at least not now.”

As for the actual chances of a recession occurring, Costello pegged a 20-to-25 percent chance of a recession, with a 10-to-15 percent chance that forecast could be wrong, with the economy instead accelerating faster.

Coming soon: a part II focusing on Costello’s views of the trucking-specific economy.