First-Quarter Trucking Outlook

Special Report

There are substantial causes for concern across all sectors of trucking .

COMMENTARY

By Jason Miller

Although 2024 is starting with some bullish sentiment for the trucking freight market , December manufacturing data from the Institute for Supply Management ( ISM ) and the Federal Reserve Board of Governors suggests weak demand conditions for both truckload and especially the less-than-truckload ( LTL ) sector — given its greater exposure to industrial freight — will continue for the next several months .

The best easily accessible measure of omnibus US manufacturing output is industrial production excluding high-tech products , as this data is not affected by inflation . Seasonally adjusted manufacturing output as of December 2023 was down a bit more than 2 % from the post-COVID highs reached in early 2022 . Excluding the period immediately following COVID-19 lockdowns , manufacturing activity in the US is at levels that haven ’ t been seen since 2011 , when manufacturers were still recovering from the 20 % drop in output caused by the global financial crisis .

Looking at more detailed data for subsectors of manufacturing , there are substantial causes for concern across all sectors of trucking . Food manufacturing and beverage production have each fallen about 2 % from 2022 highs . Paper production remains down about 10 % from 2022 levels ; paper production generates more demand for for-hire trucking companies than production of motor vehicles and parts , primary metals or plastic products .

Plastic and rubber product manufacturing has fallen 5 % from 2022 highs . Primary metal production has fallen 5 % from late-2021 highs . Fabricated metals are down about 2.5 % from early 2022 highs , as are chemicals , excluding pharmaceuticals . Wood product production has fallen 6 % from 2022 highs , as has machinery . Furniture production has fallen almost 15 % from early 2022 highs .

Looking at the trajectories of all these industrial production indexes , there are few indications that upticks are coming over the next few months . The one shining light for manufacturing in the US is motor vehicle and parts production , where output broke all-time highs in mid-2023 and , with the ending of the United Auto Workers strike , finished the year up about 4 % from late-2022 levels .

Two key factors are likely to drive demand for manufacturers in 2024 . The first concerns export demand . Unfortunately , export demand is currently not strong . For example , inflation- adjusted exports of foods , feeds and beverages are 13 % below 2017 levels and continue to trend down .

Exports of nondurable industrial supplies excluding petroleum , such as plastic resins , have fallen from their 2022 highs , which occurred because input price shocks in Europe following Russia ’ s invasion of Ukraine caused declines in energy-intensive production in sectors such as chemicals , with US exports filling the gaps . That includes industrial activity in countries like Germany , where production in energy- intensive sectors like chemicals , paper , nonmetallic mineral products — e . g ., concrete — and primary metals has fallen 20 % from late-2021 levels and does not appear poised for a rapid recovery . This suggests export demand for manufactured goods is unlikely to grow substantially over the next few months .

The second factor is the Federal Open Market Committee ’ s ( FOMC ) approach to cutting interest rates . At present , analysts are expecting six FOMC rate cuts of 25 basis points in 2024 , whereas the FOMC has communicated three 25-basis-point cuts . Given the FOMC ’ s historical strategy of not reducing rates until it is confident that inflation is under control , I lean toward the three-cut scenario , with the first cut coming in either May or June .

Although there were some positive signs of unseasonably strong single-family housing starts in November and December , I do not anticipate there will be anything near the 20 % to 30 % surge in starts seen in late 2020 and throughout 2021 .

Further , unlike in 2021 , when commodity prices rose steadily , spurring demand for construction and agricultural equipment , recent declines in commodity prices , especially corn , are likely to reduce capital investment . As such , it is difficult to see how FOMC rate cuts substantially increase manufacturing activity in just a few months ; rather , this process would likely take several quarters . Given this , I would encourage trucking company executives to plan for soft freight volumes from manufacturing firms over the next several months .

Of special interest , the ISM ’ s “ new orders ” subindex tends to predict sustained expansion of manufacturing output as measured by the Federal Reserve once there are several readings of 55 or higher for that subindex . Currently , this index has been below 50 — contractionary territory — for all of 2023 . Everyone should watch closely for those data releases and make plans accordingly .

email : mill2831 @ broad . msu . edu

32 Journal of Commerce | February 12 , 2024 www . joc . com