Economists Express Optimism as Factory Activity Improves

This story appears in the Sept. 7 print edition of Transport Topics.

Some key manufacturing indicators showed gains last week, a sign the economy is shifting from recession to expansion, several economists said. However, they warned that the turnaround is uneven, which makes business statistics confusing and trends difficult to track clearly.

“It’s not just that there are ups and downs among the indicators, but you also see volatility for a given indicator. That tells you we are at an inflection point and change is coming, and this is such a situation,” said Bob Costello, chief economist of American Trucking Associations.

“GDP [gross domestic product] is too broad. You need to look at a more selective marketbasket of indicators,” said Jack Kyser, veteran economist for the Los Angeles County Economic Development Corp.

Three large batches of economic news showed different aspects of the economy.

What looks best for trucking and freight transportation is manufacturing. The Institute for Supply Management said on Aug. 31 its Chicago-area manufacturing index for August reached 50, meaning it was poised evenly between expansion and contraction.

A reading of 50 would not usually be considered impressive, but it had been 43.4 in July, and Bloomberg News said economists had been predicting an August level of 48, or more contraction, for the Chicago index.

On Sept. 1, ISM reported unambiguous nationwide expansion in manufacturing with a factory index reading of 52.9 for August, up from 48.9 in July. Bloomberg News said it was the first improvement in ISM’s national manufacturing index since January 2008.

It also was consistent with the Federal Reserve’s Aug. 14 report on industrial production, which inched up to 96 in July from 95.5 in June. The index uses 2002 conditions as base level of 100.

UPS Inc. and FedEx Corp. executives frequently mention the Fed’s IP statistic as an important indicator.

On a related point, the Commerce Department said Sept. 2 that July factory orders rose for the fourth straight month, this time by 1.3%.

The Fed’s industrial production report and the ISM manufacturing index were the top two statistics Kyser recommended in his “marketbasket” for people interested in freight transportation. Costello also liked the manufacturing indices, as well as durable goods orders, but without aircraft orders, which bounce around too much to show a trend.

But the early and small improvements in manufacturing have not yet produced positive returns in freight volume. Year-over-year levels still seem to be declining, although less sharply than earlier, and month-to-month comparisons have improved.

That’s what ATA’s truck tonnage index did in July (8-31, p. 1), and air freight showed a similar pattern: Reuters reported Aug. 27 that worldwide air freight in July increased slightly from June and fell less sharply compared with last year.

However, in its latest weekly statement on intermodal traffic, the Association of American Railroads said containers and trailers on flatcars continue to lag behind their 2008 pace.

And June was not a good month for international surface trade in North America, the U.S. Transportation Department said. The Bureau of Transportation Statistics reported Aug. 31 that it had plunged 31.5% in dollar volume from June 2008.

The world as a whole, though, appears to be doing a little better in terms of trade. The Wall Street Journal reported Aug. 27 that the Netherlands Bureau for Economic Policy Analysis said global trade rose by 2.5% from May to June.

Beyond manufacturing, Costello said he keeps an eye on the housing industry as a possible source of help. Although the Commerce Department said Sept. 1 that construction spending dipped another 0.2% in July, Costello said single-family housing starts are on the rise.

He said single-family starts peaked at an annualized rate of 1.8 million in November 2005 before a sustained plunge that did not end until January of this year at 350,000 starts a year. As of July the rate was only 500,000 a year, but Costello said it is important that there has been steady growth since January.

“Housing creates a lot of truck freight. We want it to recover, and I think it is,” he said.

The biggest engine of the economy, though, is personal consumption, which accounts for about two-thirds of U.S. GDP. Costello said that is hemmed in because of continuing high unemployment — above 9% since May — and household debt.

“Consumers are paying down debt, which is not bad in the long run, but it does make it hard to increase consumer spending in the present,” Costello said.

Kyser said he does not expect the national unemployment figure to drop quickly, but he said there are some good signs even on employment. California, he said, has tracked an increase in overtime wage payments, and temporary employment is on the rise.

“Hiring someone is expensive, and it’s even more expensive to lay off someone,” Kyser said. “That’s why unemployment is a lagging indicator. Businesses are being ultra-cautious now.”