Logisticians, carriers fret over U.S. economy’s future

It’s become a favorite parlor game wherever shippers, carriers and logisticians meet. It could be called “How long can this fantastic economy last?” Or more accurately, “When is the next recession coming?

Nobody knows, of course. And the joke among some transport veterans is that economists have forecast 20 of the last three recessions. In fact, there’s some truth to that.

There is always at least one analyst predicting some recession somewhere. But sometimes economists do miss recessions that actually do occur.

The Financial Times recently reported over the last 27 years the International Monetary Fund has predicted every October that an average of five economies will contract the following year. In fact, an average of 26 have contracted.

“Recessions are not rare,” Prakash Loungani, a macro-economist at the IMF, told the Financial Times. “What is rare is a recession that is forecast in advance. The ability to predict downturns remains dismal.”

Because freight transportation is a leading economic indicator both of the industrial and retail economies’ actual strength, any dip in freight demand often is a correct harbinger of the next sharp economic contraction.

Here are some facts on the U.S economy:

• it’s been more than a decade since the last recession of June 2009;
• this is the longest U.S. economic expansion on record, surpassing the 1991-2001 boom era; and
• during the current expansion, Gross Domestic Product has increased 25%

But there are warning signs as well. The recently released State of Logistics report produced by A.T. Kearney, sponsored by the Council of Supply Chain Management Professionals and presented by Penske Logistics, came right out and boldly stated, “The U.S. economic outlook is softer than it was last year.” It is forecasting a sharp downturn in U.S. economic growth as soon as the next two years.

After a forecast of 2.3% growth in GDP this year, an analysis by A.T. Kearney and the IMF shows it is forecasting economic growth to drop to 1.9% next year, and just 1.8% in 2021.

The trade tensions between the U.S. and China, President Trump’s penchant for installing punishing tariffs from China and other nations and the generally accepted ebb and flows of normal economic cycles are cited by economists for their bearish forecasts.

“Combined with the unwinding of inventory buildups resulting from a pre-tariff economic import boom and growing fears of a U.S. recession that may weigh further on the outlook, the result will be lower demand for logistics services,” the SoL report said. “This is good news for shippers, but certain carriers will struggle as volumes fall.”

In fact, the slackening demand may already have begun. Some signs are looming.

Marc Althen, president of Penske Logistics, said recently that Penske’s fleet of 23,000 Class 8 rental trucks is showing a bit of flattish demand. After posing a 93 percent utilization rate last year, that is now down to 87 percent, he said.

U.S. trailer orders, a sign of how optimistic carriers are, fell to their lowest point in nearly three years in May. New trailer orders fellow below 11,000, a 54 percent drop from year-ago numbers.

But at the same time, Class 8 new truck sales boomed the first five months of the year. According to WardsAuto.com, Class 8 sales totaled more than 111,000 through May. That’s a 25.6 percent year-over-year rise.

Michael Zimmerman, A.T. Kearney principal and the SoL report’s author, said neither shippers nor carriers seemed content with business as usual. “The U.S. economy is flashing warning signs,” Zimmerman said.  

As long as Trump’s tariffs remain in place on agriculture and other products, the report added, exports will remain depressed. In fact, the IMF is predicting that U.S.-China trade tensions will reduce global GDP by between 0.2-0.4 percent while U.S. GDP losses will range between 0.3 and 0.6 percent.

Even the E-commerce boom (rising at about 10 percent a year) has a down side. That’s because it takes a great share of traditional brick-and-mortar retail.

There are plenty of bullish signs even in the 11th year of the economic expansion. The stock market, hardly the most stable of forecasting, is up about 18 percent year to date, at press time. Consumer spending rose a healthy 0.4 percent in Mary with a 0.5 percent rise in personal income.

While only 4.9 percent of economists surveyed by the Wall Street Journal are forecasting a recession to start this year, the forecast for the next two years is not nearly as rosy. Nearly half of those economists expected a recession to start next year. Another 37 percent said they weren’t forecasting a recession until 2021.

Of course, the business investment climate seems more favorable. Inventory-to-sales ratio, often used as an indicator of business confidence in future sales, has been declining since 2016. That is in large part because of newfound Just-in-Time efficiencies begun in the mid-1990s. But late last year, inventories rose dramatically as importers stockpiled goods in preparation for Trump’s tariffs. That rise in inventories also occurred amid a weakening overall sales environment.

And no matter what Trump claims, economists say don’t count on the U.S. tax cut to boost business investment and drive further growth. A recent survey of supply chain professionals reported “overwhelmingly neutral or ambiguous impact” of those tax cuts.

“Companies in the logistics industry and across the economy largely used tax savings to fund share buybacks rather than investments,” the SoL report said.

For transportation executives who must match expensive equipment and personnel capacity with fluctuating demand, these up-and-down cycles are perhaps the most challenging operating environments in which to operate profitably and efficiently. 

 Derek Leathers, president and CEO of Werner Enterprises, said in trucking it’s all about working with partners willing to mitigate risks. “What does that look like? (Having shippers) providing freight so we have predictable levels so we can plan for it.”

 That, of course, is difficult in any economy as trucking is a notoriously cyclical industry with several ebbs and flows during any calendar year. The first quarter, for example, in any year tends to be the slowest with nearly every carrier actually losing money in January, hoping to break even in February and earning whatever profit they make in the quarter in March.

But the U.S. economy, in particular, has been particularly uneven depending on one’s economic strata. Truck drivers, for example, earn on average less today they did in 2009 when adjusted for inflation, according to the Bureau of Labor Statistics. This has occurred while CEO compensation of the top S&P 500 corporations has averaged $14.5 million, increasing by $5.2 million in the past decade, according to figures compiled by the AFL-CIO.

And we haven’t even considered what impacts the exploding federal deficits may have on future growth. While in past booms, the deficit has lessened, the peculiarity of this economic expansion is that it has been accompanied by large increases in the deficit – which might exacerbate any recession to come.

Then there are pure wild cards in the equation. There are new worldwide clean diesel fuel regulations coming online next Jan. 1. They are expected to cause a short term blip in diesel fuel prices—perhaps as much as 20 cents a gallon. At worst, some analysts expect fuel market disruptions, especially in the maritime industry.

So what category of shipper are you in? There are essentially three groups: The Nervous Nellies, digesting all the data but only retaining the worst case scenarios seeing a recession after every turn; The Alfred E. Neuman “What, Me Worry?” crowd that is just rejoicing in swollen 401(k) accounts and see the good times continuing to roll; Or the Cautiously Optimistic ones who can only do all their best planning and hoping for the best even if a downturn occurs

Because, after all, the end of any economic expansion is like the death of a star in the universe. It is only visible after it occurs.