Economy plugs along; trucking, builders remain hopeful yet cautious

A modest uptick in the economy and stable fuel prices are “good news” stories, but political gridlock continues to weigh heavily on consumers and businesses as all try to make the best of a slow rebound to prosperity.

“We need to have muted expectations for this recovery,” says FTR Senior Consultant Noel Perry, speaking during the firm’s quarterly economic update focusing on freight transportation. He also noted that the 2.8 percent growth in the U.S. gross domestic product in the third quarter follows 2.5 percent growth in the second quarter. This is consistent with FTR’s positive forecast for 2014, with GDP growth predicted “in the high twos to low threes.”

But the economic details are mixed: Automobile sales are high, but are no longer expanding. Home sales are up, but expansion has slowed – and that’s from those recent, record low totals.

Additionally, the fourth quarter will likely take a hit from constructionOctober’s government shutdown, expected to be as much as 0.5 percent.

“It will be interesting to see whether we can keep up the momentum,” Perry said.

And while few economists have recession in their forecasts, the historical trend suggests a downturn could be expected by 2016 – and any business plan should take that possibility into consideration, Perry cautioned.

Perry also continued to warn against the impact of the federal deficit, at more than 100 percent of GDP.

“The people who are concerned with reducing the federal deficit, at least in the long term, are on very solid ground,” he said – although he was quick to add that, in the short term, “it’s no big deal,” assuming policy makers do work to reduce it.

The upshot, however, is that Congress will continue to fight over the deficit but will not face any dire consequences in 2014. That assumes, he added, Congress doesn’t shut down the government for a substantial length of time, and that the financial markets don’t get “tired of the political wrangling” and downgrade the debt status.

“The most likely case is a lot of annoyance in Washington, but no real change,” Perry said.

Indeed, while construction employment jumped to close the quarter, the 20,000 jobs gained was a noteworthy total largely because the previous six months had been essentially flat.

And homebuilding jobs made up only about quarter of the total and on par with the previous six months. Home building jobs were up 4.8 percent in September compared to the year before.

This comes even as construction spending improved by more than 18 percent over the same period, according to Commerce Department figures.

Indeed, according to this week’s the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), for the sixth consecutive month more builders have viewed market conditions as good than poor.
“Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road,” said NAHB Chairman Rick Judson. “Meanwhile, builders continue to face challenges related to rising construction costs and low appraisals.”

The latest Beige Book, which gathers reports from the twelve Federal Reserve Districts, likewise suggests that national economic activity continued to expand at a modest to moderate pace during the reporting period of September through early October.

Residential construction increased moderately on balance, growing at a stronger pace in the Minneapolis and Dallas Districts but only slightly in Richmond and Philadelphia. Multifamily construction remained stronger than single-family construction in a number of Districts.

A number of Districts reported concerns from homebuilders and realtors over rising mortgage rates. However, contacts in the Dallas District indicated that rising interest rates were not hurting affordability and contacts in the Boston District suggested some boost to activity by homebuyers entering the market in anticipation of future increases in rates.

Nonresidential construction activity remained modest, but varied by market and district. Growth was strong in the Minneapolis District, but up only slightly in Richmond, Atlanta, and Philadelphia. The Cleveland, Chicago, and St. Louis Districts reported increased activity for industrial building,

Perry adds this recovery has been notably “unvolatile.”

“Even though we’ve had disappointing growth, we’ve had very stable conditions which makes easy to both invest and manage a truck fleet because you’re not trying to chase a market up or down,” Perry said.

But history says business can’t count on such stability. Individual quarters could see significant swings – meaning the potential for some spot shortages in a sudden upturn, and unwarranted panic during a quarterly slip.

“My strong recommendation is that you keep your operations and your investment horizon flexible, because things can change rapidly, up and down,” Perry said. “That’s just a reality we have to deal with.”