Economic growth boosts freight demand; COVID variant creates ‘unknowns’
The trucking industry has benefited from a growing economy, but some headwinds remain like inflation and the pandemic, an industry economist said. Still, another economist said when freight demand softens, the industry should have enough drivers to meet demand.
In a recent webinar, Bob Costello, chief economist for trade group American Trucking Associations, provided an economic forecast and updates on the trucking industry. He qualified his projections based on existing trends without factoring in how the new COVID variant might affect them.
“It does increase the unknowns in the near-term outlook,” he said. “But longer-run I think we’re going to be dealing with this sort of thing as we move through the next few years and probably beyond.”
He said GDP historically has risen about 2% annually, and this year, 2022 and 2023, he expects GDP to be higher than that.
“We’ve pumped a lot of money into this economy, and it’s an economy that’s starting to grow again and come out of a steep recession,” Costello said. He added that the jobs market is an indicator of consumer spending, and people spend more when the market is improving. And it is improving but hasn’t recovered to pre-pandemic levels.
The unemployment rate fell to 4.2% in November, from 4.6% in October. The rate has continued to fall from a peak of 14.8% in April 2020. The rate was 3.5% in February 2020.
Costello noted the labor force participation rate remains low and compared it to Germany’s rate which has risen nearly 5 percentage points over the past 20 years, while the U.S. rate has fallen at about the same rate over the same period. The two countries’ rates have reached almost the same level at about 62%.
“I do think there’s less of a stigma on blue-collar work and not pushing everybody to college,” he said about the trend in Germany. “This is something that we have to tackle as a society.”
He said retail sales are up nearly 20% so far this year, compared to the same period last year. He explained that shoppers are returning to stores, but this hasn’t cut into e-commerce.
“That’s because people have more money in their pockets, even those people that lost their jobs during the pandemic,” he said. “We had stimulus money, and now we have child tax credits. That’s helping people spend more money… This means there’s more money to buy the stuff that the industry’s hauling, and that’s ultimately a good thing.”
He expects retail freight to remain strong while goods sales remain robust in 2022. He cited the low inventory-to-sales ratio as to why freight demand will maintain its strength. Even if sales slow at the start of next year, retailers will need to bring in inventory to get back to pre-pandemic levels, he noted.
SUPPLY, INFLATION ISSUES
Meanwhile, new home starts also are strong, with more single-family homes built this year than in any year since 2006, said Costello, adding that the pace of new home construction has decelerated amid supply constraints, not lack of demand. The construction industry is facing supply constraints in labor and materials. He expects new home construction to fall slightly in 2022, from this year. But he said the construction industry is likely to benefit from the $1.2 trillion infrastructure law that Congress recently approved.
Another sector that’s been strong this year has been manufacturing, even amid supply chain challenges, he said.
One of the risks to the economy is inflation. It rose 6.2% in October, from the same month in 2020, and Costello expects it to worsen in the short-term, rising to more than 7% in the coming months. As a result, he doesn’t expect the Federal Reserve to increase interest rates soon but will ease its asset purchases. The latter is expected to come to an end by the second quarter of 2022, which could lead to interest rate hikes, he said. The rise in inflation can be attributed to the supply of products and labor that’s unable to keep pace with the demand of products and labor, he explained. However, by the end of 2022, he expects inflation to be closer to 3%.
Costello said freight demand has been strong, but contract carriers are struggling to meet the demand. As a result, shippers are looking to the spot market to meet the demand.
In October, ATA’s advanced seasonally adjusted For-Hire Truck Tonnage Index rose 0.4% from September. Through the first 10 months of the year, tonnage is up 0.1%, from the same period in 2020.
“Economic growth remains on solid footing, which is good for truck freight volumes going forward,” Costello said. “The largest problem for the industry isn’t the amount of demand but making sure we have adequate supply. It is good to see that fleets were able to haul more tonnage in recent months in the face of constrained supply.”
He said truckload carriers have reduced their truck counts because they cannot find drivers, and used trucks prices have risen. Also, independent contractors, or owner-operators, who have worked with fleets are going to the spot market.
In another webinar, Aaron Terrazas, director of economic research for Convoy, explained that owner-operators who might have retired before the pandemic or at its onset, have started to return to the industry.
“It’s hard to hire quality truck drivers right now,” he said. “There’s a lot of competition for them… It’s hard to hire workers to meet the current level of demand.”
Terrazas said the existing level of demand is exceptional because of the holiday surge, the pandemic impact on the economy and fiscal and monetary policy.
“At some point that demand is going to come down,” he said. “And it’s quite likely that once that demand does come down, there will be enough drivers to meet that level of demand.”
He said when the growth begins to soften, it will be seen among the owner-operator segment because that’s where the employment gains have been the greatest over the past year.
Terrazas also provided forecasts on the holiday shopping season and into 2022. He expects holiday spending this year to be flat or up 1% from 2020. He cited buying in advance, lower consumer confidence on large purchases and high gas prices as factors impacting the spending. He noted one estimate that high gas prices are expected to shave 1-2% off global GDP growth this year.
Terrazas said he’s surprised how much restaurant and bar spending has risen given that travel remains down from pre-pandemic levels. He explained the impact of business travel on the spending, and if the travel were to return to pre-pandemic levels, this could contribute an additional $19 billion in spending for restaurants and bars.
For 2022, Terrazas said he expects more truck breakdowns as drivers operate older trucks amid tight supply of new trucks because of the semiconductor shortage. Also, as an additional number of younger drivers start on the road, he expects accident rates to rise next year.