Over the past several months, FTR’s Hotline articles for HDT have mostly addressed the consumer sector, including the freight risks associated with inflation and inventories. While we have reasons to be concerned about the potential for weaker consumer spending, we have yet to see data indicating that spending truly is falling.
Some analysts have interpreted the cooling of spot market metrics for dry van and refrigerated as a sign that consumer spending is down. However, that cooling appears to be linked mostly to a recovery in capacity among larger truckload carriers, which is serving to shift volumes back to the contract market and away from the spot market.
Freight associated with the industrial sector is not without risks, but industrial activity appears to have a much higher floor than the consumer sector. Industrial production and manufacturing output are strong. In March, the Federal Reserve’s industrial production index was at its highest level ever, and that data dates to 1919. Manufacturing output is the strongest since August 2008.
Of course, strong production is no guarantee of continued strength. After all, August 2008 was the month before the financial collapse that led to the worst period of the Great Recession. Manufacturing output plunged nearly 16% until it bottomed out in June 2009.
Unlike the situation in 2008, however, the manufacturing sector faces huge pent-up demand due to supply chain and labor challenges. If you have tried to buy new trucks over the past year or so you probably found that it takes far longer than usual. Everyone knows about the global semiconductor shortage that is significantly curtailing production of cars, light trucks, SUVs, and, of course, heavy-duty and medium-duty trucks.
Despite some recent improvements, retail inventories of motor vehicles and parts are still more than 27% below pre-pandemic levels even though vehicle and parts retail sales are running about 29% ahead of pre-pandemic levels. Even if sales fall off, auto makers still will need to push production as much as the semiconductor supply will allow for at least the rest of this year and probably longer.
Although the supply chain issues for vehicle production might be easier to isolate than in the rest of manufacturing, the entire sector is experiencing the same basic problem: Higher demand than production can satisfy. Manufacturing output excluding motor vehicles and parts was 4.6% ahead of February 2020, seasonally adjusted, but new orders for manufactured goods in the latest month were 19% ahead of February 2020.
Some of that manufacturing demand obviously would disappear if the broader economy stalls, but a significant of that production would be needed to replace worn-out or obsolete equipment. The broader manufacturing sector is not unlike commercial vehicles. Demand for additional trucks and trailers might fade, but the industry still needs to replace older equipment.
For more information, visit www.FTRintel.com/HDT or call FTR at 888-988-1699. This article appears in the May 2022 issue of Heavy Duty Trucking.