“What a consumer says can sometimes be at odds with what a consumer does. Confidence dropped, but weekly measures of consumer spending remain fairly buoyant and, from our perspective, the second quarter is looking very much like the first quarter. In other words, consumption is not losing momentum.” –Tom Porcelli, chief US economist at RBC Capital Markets
In my discussions with a variety of analysts and economists over the past few weeks concerning the outlook for freight volumes, a number of interesting factors keeps popping up.
First, as every trucker knows, “freight” is a catch-all term that encompasses everything from the raw materials used in the manufacture of any number of products to (of course) finished goods and foodstuffs purchased and consumed by (whom else?) the consumer.
Thus, from the view of these experts, one of the biggest worries during this year’s heady run-up in oil prices centered not so much upon the every-higher cost of diesel fuel being purchased by truckers but how high fuel costs overall – both gasoline and gasoline – redirects consumer spending.
Steve Tam, vp-commercial vehicle sector with ACT Research Co., explained it to me this way. “The impact of $100 oil for a sustained period of time is more broadly economic related, not so much directly trucking related,” he said. “If consumers must pay more for fuel, it takes money away from other parts of the economy. That means the economy is not generating incremental freight.”
So far, however, that doesn’t seem to be happening (at least on widespread scale) among U.S. consumers – though oil’s now been over the $100 per barrel mark for a while.
Now, to be sure, a lot of big changes are going on as gasoline passed the $4 per gallon national average mark. For example, according to a recent survey conducted by RBC Capital Markets, soaring gas prices have already caused three-in-10 consumers to reduce their discretionary spending.
The firm added that the U.S. average price per gallon of gas sat at $3.90 nationally when this poll was conducted from April 28-May 1, and it’s poll showed that another 41% said they would reduce spending when gas prices climbed above $4.50 per gallon and one-in-five said their pain threshold was $5.00 per gallon or more.
Asked the same question in March by RBC, when the average price for gas was about $3.20 per gallon, half of consumers (50%) reported that their threshold for scaling back spending was below $4.00 per gallon and 20% said it was $4.50 per gallon.
And yet there is a nugget of good information in here, at least from the perspective of Tom Porcelli, chief US economist for RBC. “The results highlight the psychological element involved with rising gasoline prices, as people revise their pain threshold according to the reality of what is happening at the pump,” he said. “This suggests that, despite what is likely to be a continued drift higher in gasoline prices given supply and demand dynamics, spending is very likely to hold up.”
Now, he did go on to note that RBC’s Consumer Outlook Index fell for May to 42.9, down 1.9 points from April's 44.8 reading, but such data may not tell the whole story.
“Consumer confidence remains fragile, as evidenced by the broad-based decline in the index - indeed, all sub-indices posted declines this month,” Porcelli pointed out. “But what a consumer says can sometimes be at odds with what a consumer does. Confidence fell, but weekly measures of consumer spending remain fairly buoyant and, from our perspective, the second quarter is looking very much like the first quarter. In other words, consumption is not losing momentum.”
Ah, but there’s another component to discretionary consumer spending, one that can be summed up in four letters: jobs. Employment is of course the key to having any money to spend in the first place, and on the jobs front, things ain’t looking so rosy.
The Department of Labor (DOL) noted this week that unemployment claims surged recently to an 8-month high, hitting 474,000 for the week ending on April 30, up 43,000 from the week before. This is the highest level since August, and a surprise to economists, who were expecting initial claims to drop to 400,000 in the latest DOL report.
That’s in part because, when it comes to recessions, the U.S. economy doesn't bounce back like it used to, according analysis by The Conference Board.
The group noted that by March 2011, the number of people employed in the U.S. was only 0.2% higher than in June 2009, when the recession ended – meaning the current recovery is the second slowest on record since 1961. Yet this is merely continuing a trend that began in 1991 of weak growth in both jobs and gross domestic product (GDP).
In fact, during the last three recoveries, neither GDP nor employment "roared back" as was typical after earlier downturns, noted Gad Levanon, associate director of macroeconomic research at The Conference Board.
“When looking across industries, the current recovery is showing some unique trends," he added. "For example, employment in construction, finance and state/local government is not only declining, but declining much faster than in any other recovery since 1960. The decline in these industries is a result of forces that go beyond the ups and downs we see in typical recessions, and a strong bounce back is unlikely in the near future."
Since the end of recession, Lavanon said total employment in construction, finance and state/local government declined by 1.06 million jobs, while the rest of the economy added only 1.3 million jobs. Here’s a jobs situation breakdown by the Conference Board:
• Hardest Hit: The number of jobs in construction (-8.1 percent), finance (-1.8 percent), and state and local government (-1.0 and -2.6 percent respectively) continued to decline in the 21 months after the end of the recession.
• Disappointing: Healthcare and leisure and hospitality jobs have recovered, but at a rate slower than any since 1960.
• Doing OK: Manufacturing suffered less job loss than in recent recessions, and in the last 12 months, manufacturing employment has grown at the highest rate since the 1990s.
• Shrinking Government: The growth in federal government jobs during the recovery has been historically high (38,000), but not enough to offset the unprecedented losses in state and local government jobs (-429,000).
In the near-term, employment growth will continue to be slow, said Levanon, with the housing downturn, high oil and commodity prices, government austerity measures and limited consumer spending preventing GDP growth from being more robust.
Indeed, he thinks unemployment is likely to remain above 8% through 2012 and that GDP growth will slow down as well, increasing just 2.5% in 2011 and 2012, much lower than the rate of 3.5% to 4% typically reached during expansions.
"Longer-term prospects are more promising, however,” Levanon stressed. “In the last six months, employment outside of construction, finance and state and local government has already been growing faster than nearly any other six-month period in the last decade. Once constraints in these hard-hit sectors loosen, overall job recovery is likely to pick up pace.”
Well, let’s hope so, because without jobs, there ain’t no spending – and if there ain’t no spending, there won’t be any freight.