Mostly Good News Drives U.S. Economic Engine

Article by John Wagner Jr from Wagner Logistics published on May 14th

Need further evidence that the economy continues to improve? The four-week moving average weekly jobless claims number has dropped to 336,750, its lowest point since November 2007. The unemployment rate is still at 7.5 percent so we still have a long road to get back to a 5 percent rate.

However, there is mixed news. Retail sales continue to be sluggish amid other signs of spring economic weakness.

The Commerce Department reported that March sales of U.S. wholesale goodswere off by the highest amount in four years, resulting in a 0.4 percent gain in wholesale inventories. First Data Corp. reported that spending slowed in April as their electronic payment data showed a year-over-year dollar payment growth of 5.1 percent, down from 6 percent in March. Higher gasoline prices are most likely the cause.

Driving the Surge

Regardless of these bumps, analysts are forecasting a first-quarter GDP of 3 percent, with energy production and new housing construction leading the charge. The Census Bureau reports that March housing starts were up 47 percent in year-over-year comparison. The Energy Department says oil production is running 20 percent higher than 2012 levels.

But, don’t we still have to worry about the sequester; the automatic $85 billion in spending cuts? It is still out there, but the cuts are masked by a surge of tax revenue and bailout payments easing the pressure for Congress and the President to make a fast deal.

Fannie Mae will pay back the government $59.4 billion in dividends at the end of June and Freddie Mac is planning to pay about $7 billion. This is on top of a 16 percent increase in tax revenue, resulting in the federal deficit being $231 billion less through the first seven months of the fiscal year.

In April, following tax day, the U.S. posted its largest monthly budget surplus in five years with record revenue. The budget surplus was $112.89 billion in April, compared with $59.12 billion a year earlier.

The U.S. deficit is projected at $845 billion for fiscal 2013 (which ends Sept. 30), according to the Congressional Budget Office estimate. That would be the first deficit in five years below $1 trillion.

The government is still spending more money than it brings in but all this increased revenue takes some pressure off Washington to come to a quick sequester agreement. However, with $16.7 trillion in U.S. debt and an aging population taking advantage of Medicare benefits, everyone knows Congress will have to tackle the problem eventually. The next brinkmanship game will be played out around May 19 as the debt ceiling is hit, unless Treasury can pull a rabbit out of its hat.

The U.S. Postal Service reported a $1.9 billion loss for its fiscal second quarter (ending March 31), compared with a $1.3 billion loss in the previous quarter. Officials attributed the loss to a continued decline in mail volume and their mandate to pay $5.5 billion into a health fund for future retirees. The USPS effort to save $2 billion by dropping Saturday delivery has been scrapped.

On balance, though, I would have to say the economy is improving. Just look at your 401(k) balance (hopefully) after the recent stock market surge.

Trucking News

The American Trucking Associations said truck tonnage rose 3.8 percent in March year over year. ATA also reported that its seasonally adjusted March index was 0.9 percent higher than February. It should be noted that loads were heavier and shipment count is flat.

Another confirming view came from the Department of Transportation’s March freight transportation services index, which increased 2.8 percent.

Shippers are benefiting for now as the balance of trucks versus freight volume is pretty even. If there is a big uptick in shipments there is going to be a fight over truck capacity. If there is a surge in holiday shipments, pricing will react accordingly.

The Journal of Commerce reports that its Truckload Capacity Index shows that among the large truckload carriers, available capacity is 17 percent below its 2006 peak. J.B. Hunt cut its tractor fleet in half from 2006 to 2012 and other carriers have done the same while showing huge growth in their intermodal businesses.

As drivers become more difficult to hire and keep, truck capacity will remain tight.

Smaller Carriers Struggle

Smaller carriers are also having a tough time as they lack the capacity leverage of the bigger carriers to push through higher pricing. As smaller carriers’ costs rise they must adjust their pricing to keep pace.

Where are these rising costs coming from for the smaller carriers? The Federal Motor Carrier Administration’s Compliance, Safety, Accountability (CSA) program is a work in progress for carriers and the cost of administering it is high. A small carrier may not have enough equipment inspections to even get a CSA score. Even a score near the threshold won’t get loads as brokers and shippers may avoid those carriers for fear of being charged with negligent carrier selection in a court of law.

The expense of adding speed limiters and electronic on-board recorders also drives up cost for the smaller carriers. On top of that, the EPA-mandated emissions controls have driven up the cost of a new tractor by $30,000.

Carriers also know the new Hours-of-Service rules, set to go into effect July 1, will reduce productivity by 5 to 10 percent. Drivers cannot listen to their own body clock to decide when they should rest.

The new 34-hour restart provision is the most troubling, as it requires that drivers’ weekly schedules be reset once a week. Each resetting must include two consecutive nights of sleep, each inclusive of the hours from 1-5 a.m.

West Coast domiciled drivers are really negatively impacted while on the East Coast in that they cannot start out after their weekly rest until 8:00 a.m. EST. Rather than get a jump on the rush hour, a driver has no choice but to sit and wait. It is no wonder carriers are substituting intermodal for long-haul trucking where they can.

Finding drivers gets harder all the time too, once more because of additional regulations. The National Registry of Medical Examiners is contemplating body mass index testing to see if a potential driver may have sleep apnea. At $3,000-$5,000 per test, who is going to pay? How many drivers have a high body mass index? How many potential drivers will a new regulation eliminate? The answer is – a lot.

Also of note recently is an overture by YRC Worldwide to acquire ABF. ABF rebuffed the idea but the pool of Teamster LTL companies has dwindled to a handful. Speaking of Teamsters, they recently came to agreement with UPS on a new contract.

Working On the Railroad

The Association of American Railroads said that rail traffic rose in both intermodal and car loadings in the week ending May 4. Total U.S. carloads increased 2.8 percent to 283,916 and total intermodal volume also climbed 2.8 percent to 245,678 units compared year over year.

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