Persistent Overoptimism Three Ways: Truckers, Fed Economists, Manufacturers

The other day I noted a persistent overoptimism regarding manufacturers.

Since then, I have seen a couple articles regarding overoptimism at the Fed and overoptimism in trucking. Of course, there is also persistent overoptimism about earnings growth and  stock market expectations.

The track record on recessions is perfect. The Fed never sees them coming. Let’s investigate the overoptimism phenomena starting with trucking.

Profit-Killing Overcapacity in Trucking Coming Up  

SupplyChain247 asks Is the U.S. Trucking Industry Entering a Profit-Killing Era of Overcapacity? 

 As surface transportation’s peak period ends for the year, and trucking eyes the traditionally slowest time for the industry as first quarter 2016, economic signals are, at best, mixed.

U.S. factory activity grew last month at its slowest pace since May 2013 as manufacturers pared their stockpiles and cut jobs.

The Institute for Supply Management’s index of factory activity slipped to 50.1 in October from 50.2 in September. The figures barely signal growth, which is any reading above 50.

Third-quarter Gross Domestic Product grew at a 1.5 percent annual rate in the third quarter, far below the 3.9 percent pace in the April-June quarter.

What the Economists Are Saying

“We’re hopeful this will mark the low,” Ian Shepherdson, an economist at Pantheon Macroeconomics, said in a note to clients. “It looks as though the downshift in manufacturing activity may be coming to an end.”

ABF Freight, the seventh-largest LTL carrier reported a decline in revenues due to lower fuel surcharges and lower tonnage levels, even though shipments rose year over year. But ABF showed “great cost discipline,” Stifel analyst David Ross noted.

UPS Freight, the fifth-largest LTL, reported tonnage off 10 percent (matching the record decline reported in the 2009 3Q during the depth of the Great Recession) and shipments down 5 percent year over year (the worst drop since 2008 fourth quarter).

That has spread to the truckload side as well. Heartland Express, the 12th-largest TL, reported a whopping 35 percent drop in third quarter earnings year of year. Operating revenue decreased 15.9 percent to $182.5 million. Revenue, excluding fuel surcharge revenue, decreased less precipitously, by 8.1 percent to $160.7 million.

Bob Costello, chief economist for the American Trucking Associations, recently told an industry gathering that the third quarter economic slowdown was merely a blip on the radar, fueled by manufacturers and retailers burning off excess inventory from earlier in the year.

“The U.S. economy is on sound footing,” Costello said at the ATA Convention in October. “When the inventory adjustment is done, there will be a high level of freight.”

“My personal belief is the trucking industry needs to realize production of goods will have ups and downs,” Satish Jindel, principal of SJ Consulting, which closely tracks industry pricing, told Logistics Management. “They should not build capacity built on rosy outlooks coming from economists and other organizations that have a bias to be optimistic.

“The reality should show they should only have capacity to handle base GDP growth rate,” JIndel added. “Everything above that should be handled by methods that can provide capacity on interim basis. So they’re not stuck with excess drivers and trucks.”

So far, the industry does not appear to be doing that. Sales of Class 8 heavy trucks are on pace for one of the best years in history – around 260,000 units in North America. That is a warning sign of future overcapacity, Jindel said.