Interest Rates Rise, But Is It Enough?
January 19, 2000
Friday's report on the January labor market suggests that economic growth is accelerating rather than declining, as was widely expected. 387,000 new jobs were added last month. Even after subtracting the 116,000 new construction jobs due to unseasonably warm weather in early January, this is almost the number that the Federal Reserve board believes can be absorbed by the economy without causing more inflation than strong labor productivity growth can offset. A companion survey of households found 918,000 more people employed in January than in December. While this survey is often volatile, this is too big a number to ignore.
Manufacturers hired 20,000 new production workers last month after three months of steady employment. Import and export data not yet available are expected to show strong January gains. As a result, trucking and warehousing companies added 4,000 jobs in January, after seasonal adjustment. This does not include any additional owner-operator drivers. Employment is now 6% above last January.
All of the usual precursors of a spike in inflation are now appearing: rising wage rates, higher commodity prices, rapid growth in the money supply, a declining international exchange value of the dollar, higher loan demand, looser credit standards and higher default rates and slower deliveries of industrial materials. On top of all this, consumer confidence hit a record high level in January.
But so far the Federal Reserve Board has not gotten overall economic growth under control. Unless this happens soon, the GDP growth rate will not slow as expected from 1999's 4% rate to 3.5% this year. A 0.5 percentage point increase in GDP would result in about an additional 1.5% jump in freight volume this year.
The timid 0.25% boost in interest rates earlier this week is not enough to slow the economy to a pace that does not aggravate inflation. Expect several more increases of at least this size that will take a big bite out of consumer spending later this year.
It is increasingly likely that the fed will have to stand on the credit brakes to slow economic demand. The impact on trucking will vary widely by sector. Construction will be hit by a loss of starter homes and apartments. This impact will be felt mostly in the "hot" growth areas, such as the South Atlantic, Texas and the Rocky Mountains. The current boom in highway and heavy construction spending will not be affected. The money is already committed.
The high tech centers will be largely immune; most of their sales are either exports or replacements for older technologies. The rust belt from Maine to Illinois and older urban areas will have less freight activity as less efficient factories slow down or close in favor or newer facilities in the South, the West or abroad. Equipment sales will be surprisingly strong this winter and then weaker than previously expected for the rest of the year.