Down … but not out

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There has been a significant shift away from optimism for the U.S economy among U.S. industrial manufacturers over the past three months. Yet they aren’t pessimistic.” –Barry Misthal, global industrial manufacturing leader for global consulting firm PricewaterhouseCoopers

If there’s anything good to be said about the state of the U.S. economy right now (and for the global economy, too) is that we’re definitely down but not out.

Things are certainly unpleasant and will probably become more unpleasant before we start seeing improvements. That’s cold comfort to those unemployed and under-employed, but it’s sure better than some of the alternatives – such as the feared “double dip” recession.

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Take a look at freight volume trends of late: The American Trucking Associations’ (ATA) for-hire truck tonnage index jumped 1.6% after falling a revised 0.5% in August. Nothing to pop champagne corks about, obviously, but compared to the September and August last year, tonnage is up 5.8% and 4.9%, respectively. I, for one, will take that, thank you very much.

More critically, though, in the third quarter tonnage is up 0.4% from the second quarter. That’s important, according to Bob Costello (at right), ATA’s chief economist, because the right before the last two recessions hit, truck tonnage took a nosedive. But that’s not happening this time, he explained.

“I continue to believe the economy will skirt another recession because truck tonnage isn’t showing signs that we are in a recession,” Costello stressed. “Tonnage is suggesting that we are in a weak growth period for the economy, but not a recession.”

He also pointed out that the quarter-to-quarter bump-up in freight volumes, while small, is a sign of small gains for the broader economy, not a contraction.

Here’s another positive data point: according to the Bureau of Economic Analysis (BEA), the U.S. gross domestic product (GDP) almost doubled in the third quarter versus the second quarter – increasing at an annual rate of 2.5% versus 1.3%.

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Now, a word of caution: this is the BEA’s “advance estimate” for GDP, meaning the agency will revise it down the road and more accurate data is gathered. That’s what happened in the first and second quarters, and that data downshift let a lot of air out of “good mood” balloon across the country pretty quick – with all sorts of negative implications for the U.S. economy

Look at the mood in the manufacturing sector, for example – a sector that generates an awful lot of freight for truckers. Indeed, the ongoing U.S. economic recovery (such as it is) has been driven largely by manufacturing activity, so it’s important not to take their mood lightly.

According to the Q3 2011 Manufacturing Barometer survey conducted by global consulting firm PricewaterhouseCoopers (PwC), optimism about the prospects for the U.S. and the world’s economies over the next 12 months are hitting all-time lows among U.S. industrial manufacturers.

To wit, only 5% of 60 or so major U.S. industrial manufacturer polled by PwC are optimistic about the prospects of the U.S. economy over the next 12 months – down 43 points from the second quarter, the lowest “positive” reading since the fourth quarter of 2008. The vast majority, 77%, remain uncertain about U.S. economic prospects while 18% are pessimistic.

Prospects for the world economy over the next 12 months mirrored manufacturer’s negative U.S. outlook, with only 7% of U.S.-based industrial manufacturers who market abroad being optimistic about the prospects for the world economy down 31 points from the prior quarter. The majority – some 72%, are uncertain and 21% are pessimistic, PwC’s survey discerned.

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“There has been a significant shift away from optimism for the U.S economy among U.S. industrial manufacturers over the past three months," said Barry Misthal (at left), global industrial manufacturing leader for PwC.

"Yet they aren’t pessimistic, which aligns with how they positively view their own revenue prospects and are positioning and driving their businesses for growth in the next 12 months,” he stressed. “The findings of the Q3 Barometer suggest that the strategic investments and plans being made by U.S. industrial manufacturers are strengthening their company’s potential in the face of an uncertain economic environment.”

PwC’s poll found that while the projected average growth rate for own-company revenue over the next 12 months fell to 5% from 6.5% in the second quarter, 75% of the manufacturing firms surveyed expect their companies to grow over the next 12 months. Of those expecting growth, 22% forecast double-digit growth and 53% single-digit growth, while 20 percent forecast zero growth and only 5% expect negative growth.

Again, I’ll take that, thank you very much!

“Looking back to the fourth quarter of 2008 when optimism was at an equivalent low but pessimism prevailed, the average 12-month forecast was minus 2.4%, dramatically lower than the current five percent average level,” noted Misthal.

“But in contrast, the current forecasts remain pretty strong for U.S. industrial manufacturers – albeit a bit lower than the calendar year 2011 revenue growth forecasts of 5.6%,” he pointed out. “This may suggest that U.S. industrial manufacturers are more concerned with future growth beyond 2011 and potential softness in 2012, which will make comparisons to this year more difficult.”

In the third quarter this year, 80% of surveyed U.S. industrial manufacturers saw no change in the U.S. economy from the second quarter, while 13% believed it was declining and only 7% believed was growing, down 50 points from the prior quarter.

Similarly, the majority of respondents (56%) that market abroad viewed the world economy as unchanged in the third quarter when compared to the second quarter, with only 7% of the participating manufacturing firms of the opinion that the global economy is growing –a drop of 34 points from the prior quarter – while 37% think it’s declining.

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Still, even with all that in mind, U.S.-based industrial manufacturers that sell abroad continued to see upward movement in international revenue during the third quarter, with 48% reporting an increase in sales, 44% noting sales at the same level, with only 8% reporting a decrease over the past three months.

“More than 90% of respondents noted international sales were either up or the same compared to three months ago and projections continue to rise, demonstrating that they are finding good opportunities to expand their businesses overseas to confront concerns over a retrenching U.S. economy,” added Misthal.

Yet these manufacturers remain realistic, well aware of the challenges facing them. For example, “lack of demand” climbed 17 points over the second quarter, meaning 57% of those polled now cite this as the leading potential barrier to growth over the next 12 months.

A majority also cited oil/energy prices, which was the leading barrier for the previous two quarters, and legislative/regulatory pressures, both coming in as the second leading barrier, cited by 55%. Taxation concerns dropped 13 points to 40%, and pressure for increased wages was off 10 points to a lower 22%.

“There is a direct correlation between a majority of respondents citing a lack of demand as the biggest barrier to growth and their staff levels staying the same,” Misthal noted. “When there are concerns about the trend of customer orders, companies are generally cautious about bringing in additional workers.”

Taken together, though, this still creates a lot of positives for freight – especially as carriers are still keeping a tight rein on capacity. Thus, whether freight levels inch up or stay flat, then, truckers should remain in a pretty good position to make money, either way. And that’s something that couldn’t be said about this industry just a few short years ago.

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Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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