The possibility of the economy entering a recession, at this point, appears to not be a matter of if it occurs, but when will it occur. That was a key theme in a session this week at the SMC3 JumpStart 2023 conference held in Atlanta.
Brent Hutto, Chief Relationship Officer for New Plymouth, ID-based Truckstop, explained that it is likely there will be some sort of recessionary activity in the economy, most likely because it is probably needed. And he said that a major driver for it is related to monetary policy actions by the Federal Reserve to stave off inflation, which, while still at high levels, is starting to inch down, with inflation impacting small carriers, large carriers, and consumers alike.
“To me, it is more of a corrective action more so than anything else, because things ran so high during the pandemic for so long,” he said.
As for the timing of a 2023 recession, Hutto said he thought it was likely to occur in the second quarter or early into the second half of the year.
Washington-based American Trucking Associations (ATA) Chief Economist & Senior Vice President of International Trade Policy and Cross-Border Operations Bob Costello said the most likely scenario, as it relates to a recession, is that it will be mild and fairly short, with the caveat that the timing for it could be somewhat tricky, adding that December inflation and retail sales data could portend it as occurring in the first quarter.
“Housing is already in a recession, and manufacturing [output] and retail sales are down,” he said. “It could still be a first quarter event, but it is going to be relatively short and mild despite the Fed being very aggressive. But the freight economy is worse, and the reason the freight economy is worse is because if you go back to the pandemic, we were stuck at home, not going to movies or sporting events or traveling and we just started buying stuff. And all the carriers started hauling that stuff and delivering it. We are now on the reverse side with people back to going on vacations and to restaurants, among other services-related activities, and that is eating into goods spending. But now on top of that there is a recession in housing, and manufacturing, which has grown the last few years, is starting to contract. If you add all of that up, then you have a freight recession, and that is essentially what is going on.”
Addressing the current state of inventory levels, Costello said it is somewhat nuanced, in that in looking at inventory-to-sales ratio data from the U.S. Census Bureau, it does not seem like inventories are “too bloated,” with inventory levels heading back to pre-pandemic levels.
“If you peel it back on the retail side, it is really the big box retailers are the ones with too much inventory, and that is a cycle that is also a headwind for freight,” he said. “It is improving but still ahead of where we were but moving in the right direction.”
Overland Park, Kan.-based LTL carrier Yellow Transportation Chief Commercial Officer Jason Bergman labeled the current state of the market as “extraordinary,” with some parts of the economy doing better than others, or a K-shaped situation.
For general merchandise retailers, he noted that regardless of where their inventory levels stand, they will need to be replenished, with it being a matter of by how much.
And he addressed other key metrics that have the potential to factor into a potential recession, including recent declining manufacturing data, which he said could leave manufacturers a lot more conservative about building up inventories into the spring.
“It goes back to the bullwhip effect, with inventories being too much or not enough, and [shippers] need to figure out what that mix is,” he said. “There are other factors, too, like single-family housing down, while non-residential construction is doing very well.”