3PL Perspectives
GREAT NEWS! 2022:3 GDP came in at 2.6% growth (annualized). Maybe not so great: Last week, the Bureau of Economic Activity (BEA) released its first estimates of third-quarter 2022 GDP growth. It will update those numbers twice before January, but the final numbers will be near the estimate we saw last week. The 2.6% is certainly well above the negative numbers of the last two quarters. As usual, however, the devil is in the details, as shown in a breakdown of the 2.6% total output quoted above and supplied by the BEA in the supporting tables accompanying its release. They divide the total number into the portion of GDP growth contributed by each major economic sector. Here’s what those detailed numbers mean for trucking.
Trucks move goods, a subset of consumer expenditures. The overall consumer expenditures contributed .97 percentage points, so-so for a growing economy, but still positive. Remember, though, how I have been harping on the split between spending on goods and services. The economy has been skewed toward goods during the COVID-19 crisis, which is a very good thing for trucking. When might that shift back toward normal? These latest numbers indicate that process is now occurring. Goods consumption had a negative contribution of .28 percentage points during the third quarter. We see then that the economy consumed fewer goods last quarter than the quarter before, even while services came in at a plus 1.28 percentage point contribution to GDP growth. That is not good for trucking.
Trucks move things that people and firms invest in: The third quarter was also a bad quarter for investment, coming in at -1.59 overall. Importantly, the mix within that number was also negative. When investment in ideas is subtracted, the number falls to -2.96. That number includes -.7 for inventory investment. There are still lots of anecdotal comments about product shortages. Those anecdotes fly in the face of an economy reducing inventory in the last two quarters. Notice how the flatbed numbers from Truckstop.com have collapsed in the last six months. Flats move things people invest in.
Thank goodness the numbers get complicated when factoring in exports: Without complexity, who would need a Harvard-trained economist? Q3 was a good quarter for exports of goods, +1.34 percentage point contribution to GDP. It was a good quarter for truckers hauling things for export, although we must remember that American goods exports tend to be bulk commodities that move by rail. With imports that do move heavily in trucks, the math gets complicated. The BEA reverses the contribution signs with exports. Export growth is reported as a negative because those goods are assumed to be subtracted from domestic production. The measure again is ‘Gross Domestic’ Production. Using the same logic, a decrease in imports makes a positive contribution to GDP because such goods are assumed to be added to domestic production. This quarter there was a significant reduction in imports, with 1.2 percentage points of growth added to GDP. If indeed those reduced imports were one-for-one converted into on-shore manufacturing output, such a quarter would be very positive for trucking. If so, we add those 1.20 percentage points to GPD growth and to trucking growth. Without them ‘trucking’ GDP growth was quite negative. I’ll give you a number after I talk about government. Don’t worry; I will not rant and rave about the governments WE elect, at least in this piece.
As usual, it takes even more finagling to make sense of governmental contribution to growth: The total was .42, a modest number that, unfortunately, includes both service consumption and investment/goods consumption. Using some of my West Philly windage, I estimate that .12 of those percentage points are good for trucking. Result: a very small positive for trucking. What about the infrastructure bill and its contribution to economic growth? It takes time for those dollars to flow.
How’s it all add up? The accompanying chart summarizes my analysis of the latest BEA Q3 GDP ‘trucking’ contributions. These are the parts of the BEA’s calculations that relate strongly to trucking freight. Each percentage point of growth means the same for trucking, whether it comes from consumption or international trade. We conclude then that investment is the biggest negative and trade is the biggest positive. The total is, unfortunately, a negative. That negative means that the particular mix of a moderately successful economy, growing at 2.6%, makes that economy a weak one for trucking.
Mix counts as I feared: This situation is the first stage in a two-stage threat to trucking growth. We are seeing the maturation of the shift back to a normal mix of activity, a mix less attractive to trucking than the one we have been enjoying since Q3 2020. Q3 2022 strongly suggests that this declining trend will continue.
How one measures economics means a lot: I measure trucking loads and price levels in two ways. The first is to calculate where the industry is above or below the trend. Since the current market is about 10% above trend, one concludes it is a strong market. The chart below shows the performance of four metrics when compared to the long-run trend. Trucking is way above the trend in volume and price. One can see this clearly in the trade press reports concerning the attractive Q3 financial reports of the large publicly traded carriers. I also measure how trucking activity is changing, as in the GDP growth metrics discussed above. From that perspective, conditions are weakening, exactly as one would expect for an industry operating well above normal. Statisticians call this ‘regressing to the mean.’ In West Philly, where I grew up, we called it ‘back to normal.’ The contrast between these two types of measurement leaves us with a curious emotional state within our industry. Freight levels are strong, as are profits, and yet people are becoming uneasy about the lack of growth. Those who have been spending as if the record good times were going to last forever should be uneasy. The rest should remain confident in their ability to make money despite the moans of their competitors about a weakening market.
Things could get worse, perhaps a lot worse: The second stage in the twostage threat to trucking growth I mentioned above is the chance of the economy shrinking into recession. To get my forecast of that threat, refer to my last missive about the industry’s prospects for 2023. In that forecast, I presented my strong fears about a 2023 recession. All I want to say here is that a recession WOULD move the industry below trend as it did in 2008. A move below the trend means the modest shrinkage of Q3 would morph into a full-scale plunge. Should this possible recession equal the 2008-2009 event, as I fear, freight volumes would bottom out 5% below trend by early 2024. That shrinkage would put all carriers under stress, not just those living in the past.
No need to head for the bunkers yet: If Q3 GDP had come in negative as it did in Q1 and Q2, I would have concluded that we have entered recession. But 2.6% is hardly negative, even if much of the contribution comes from the arcane calculation of trade flows. And here’s why I remain pessimistic—for two reasons. First, the numbers confirm a negative mix shift which promises declining truck volumes and pricing in 2023, recession or no. Second, the dominance of the inherently volatile trade numbers in the positive total causes me to suspect the economy’s health. Such murky performance is typical of an economy approaching a major turning point.
These numbers cause me to offer two pieces of advice.
- Figure out what your ‘normal’ market is and manage to it. Normal is where you are headed, however favorable things feel now. Put any surpluses in the bank.
- Figure out your strategy should a recession occur, and monitor conditions closely to determine whether you need to execute that strategy. If we avoid a recession in 2023 or 2024, save that strategy for when the market suffers the inevitable next recession. Slumps do eventually happen, even if my forecast for 2023 is wrong.
