Truckable Economic Activity (TEA), MacKay and Company’s proprietary measure of the trucking economy, continued to advance at a brisk pace in the third quarter of 2018.
While a 5.0 percent rate of gain posted in the third quarter was nearly identical to the 5.1 percent pace it attained in the second quarter, the composition of the increase was considerably different from those seen earlier in the year.
The differences can be traced, in many cases, to the changes that have taken place since the tariff battles between the U.S. and several of its trading partners took effect in the middle of 2018. Other differences can be noted when looking at the performance of several key sectors, such as residential construction and transportation equipment, both of which may be reaching a plateau. All of these factors will play an important role in how the trucking economy proceeds over the course of 2019.
Impact of monetary policy, taxes and spending
Behind these industry-specific concerns, there is the continued debate over the course of monetary policy and the question of how much more of a stimulus the changes to the tax code will provide.
The recent pronouncements from the Federal Reserve suggest that they are closely evaluating their strategy for 2019. After meeting their target dates for increases in the Federal Funds rate in 2018, it appears the Federal Reserve is waiting for economic news about conditions in 2019 before going further.
While they have not ruled out the possibility of further increases in interest rates in 2019, the Federal Reserve is emphasizing its reliance on the actual economic numbers to guide the timing and size of any further action. This stance is consistent with their objective of getting to a level of interest rates that will help to sustain further economic growth as compared to a strategy that would stimulate further growth.
On the tax side, things are a bit more complex because analysts are trying to evaluate two different measures. The personal tax cut has had the desired immediate effect of stimulating consumer spending. In addition, the gains there have been significant contributors to both TEA and gross domestic product (GDP).
On the corporate side, the industry saw some acceleration in equipment spending early this year. This trend can be expected to continue into 2019. The main source of concern, however, is in the construction component of business spending. Nonresidential structures, which includes oil and gas exploration as well as the building of plants and commercial structures, has been moving strongly forward. Residential construction, meanwhile, appears to have plateaued.
Imports and exports
The most worrisome aspects of the outlook for next year are in truckable imports and truckable exports, which together account for 26 percent of total truckable activity.
On the export side, the U.S. economy is first going to have to contend with the direct effect of the loss of markets in countries who have levied tariffs against U.S. products. In addition, exporters will have to contend with the effects of the strong dollar and the general uncertainty that is affecting the economies of Europe and China. Most of the problems in Europe are related to the impending withdrawal of the United Kingdom from the European Union, known as Brexit; while those in China have to do with slower growth stemming from their government’s efforts to better regulate aggregate economic activity.
On the import side, the U.S. economy will have to continue to adjust to changes in trade volumes as domestic producers react to the tariff regime. It is expected some of the demand will be met by producers upon whom the U.S. has not levied taxes.
In addition, the industry is likely to see some changes in trade volume as purchasers go back to their regular pace of buying. There have been several instances of accelerated buying to beat the tariff deadline.
What to anticipate in the coming year
Lest you think that all we can come up with are reasons to worry about the growth of TEA, it is important to mention the latest news from the public sector; specifically that state and local spending on structures is quite good. After several years of adversity during and after the last recession, this category of spending has lately been showing considerable vigor.
Based on the data through the third quarter, it appears TEA growth should come in at, or near, 5.0 percent for 2018. This would be its best annual performance of this expansion.
With all of the components of TEA still on firm footing, our forecasting model strongly suggests the trucking economy should continue to expand in 2019, but not with quite the vigor it showed this year.
With a long career managing portfolios and coordinating domestic economic forecasting programs, Bob Dieli began RDLB, Inc. in 2001. In this role, Dieli serves as an advisor to many firms in truck, consulting and financial services sector. He is also an Economist with MacKay & Company.
