Current market trend of slow freight expansion have remained unchanged, while fuel prices have remained relatively tame, paving the way for favorable conditions for rates and surcharge recovery, according to an Eaton Corp. analyst.
Arun Raha, senior economist at Eaton, told Fleet Owner that it appears that the economy is leaving the “soft patch” that has worried many analysts. “All indicators are freight is still growing, but at a slower pace. Some take that [as indicating] the economy has hit a soft patch, while others think the soft patch is temporary. I fall in latter camp,” Raha said, noting continued strength in manufacturing, housing and construction, and jobs.
Indeed, recent reports of job growth and the expansion of personal income have been positive. The Bureau of Labor Statistics reported widespread growth in April as nonfarm payroll employment increased 274,000 over the month. Disposal personal income-- a measure of combined wages, interest and dividends less taxes— increased 0.5%, while consumer spending rose 0.6%, according to the Bureau of Economic Analysis.
Manufacturing production remained unchanged in April, but showed 3.5% more activity on a year-over-year basis according to the U.S. Census Bureau. The durable goods sector was steady overall, but the production of motor vehicle parts fell 3.5% compared with March. Production for wood products, primary metals, and furniture posted declines, but was offset by gains in machinery, computers and electronic products and aerospace. Nondurable goods production saw widespread increases of 0.2%.
Raha said that despite recent quarterly earnings woes from Ford and General Motors, automotive manufacturing continues to be stable. “The automotive industry is selling cars, there are just issues in the cost side of the equation, which is a completely separate issue,” he said. “The housing market is also stable but there will come a time when housing will soften.”
New home construction continued to be a bright spot, since it looks as though the pace for this segment from January through April is 6.9% brisker than the same period last year, according to data from the U.S. Census Bureau. In April, privately owned housing starts rose 11% above the revised March rate to a seasonally adjusted annual rate of 2,038,000—which marks a 3.6% year-over-year gain.
Construction spending for the first quarter totaled $815.5 billion, a robust 9.3% jump year-over-year, the U.S. Census Bureau said.
However, despite recent drops in diesel prices over the past month, it appears that they will remain at historically high levels, and energy prices will stay volatile for the foreseeable future.
Federal Reserve Chairman Alan Greenspan warned that recent volatilities in the oil and energy markets are likely to stay for the long term. Noting the growing thirst for energy in emerging economies such as China, Greenspan added, “Aside from uncertain demand, the resolution of current major geopolitical uncertainties will materially affect oil prices in the years ahead. Besides feared shortfalls in crude oil capacity, the status of world refining capacity has become worrisome as well.
“When choosing capital projects, businesses in the past could mostly look through short-run fluctuations in oil and natural gas prices, with an anticipation that moderate prices would prevail over the longer haul,” Greenspan continued. “The recent shift in expectations, however, has been substantial enough and persistent enough to direct business-investment decisions in favor of energy-cost reduction.”
Despite fuel concerns, a tight capacity in the transportation industry has created an environment that is conducive to larger carriers—and there are no indications that this trend will change in the foreseeable future. “Even though freight is growing more slowly, trucking’s utilization rates are above normal,” Eaton’s Raha said. “There was actually a shortage of freight carrying capacity--not just in trucking, but in rail as well. This has allowed at least the bigger fleets to pass on the cost of higher fuel to their customers.”
