Bob Costello at McLeod: healthy economic activity but slower growth

The chief economist of the American Trucking Associations (ATA), Bob Costello, does not see a macro recession on the near-term horizon and is relatively sanguine about the American economy apart from trade policy.

That was the message Costello delivered during lunch on Monday, August 26, at the McLeod Software User Conference at the Gaylord Rockies in Aurora, Colorado.

“The good news is that the U.S. is an island of growth that’s better than nearly every other industrialized economy,” Costello told McLeod employees, customers, and vendors at the conference. Gross domestic product is still at or slightly above the country’s long term trend of two percent growth, Costello explained. 

Yes, the current economic expansion is the longest on record and job growth is likely to slow — unemployment is at about a fifty year low of 3.7 percent — but retail is set up to do fairly well. Almost everyone who wants a job has one and wages are rising. Americans don’t save much of their money, Costello said — in June the average household saved 8.1 percent of its income — instead, they spend it. And much of what they buy is transported by truck.

(Photo: FreightWaves)

“The economy moving at a slower pace is not necessarily a bad thing when you have a Fed that understands how the economy is slowing down,” Costello said. He cited the adage that economic expansions don’t die of old age; they’re murdered, and usually by the Fed. But the risk that the economy would overheat and that the Fed would respond with aggressive rate hikes and tip the country into a recession seemed to have been averted in July when the Fed cut rates by 25 basis points in what Chairman Powell called a “mid-cycle adjustment.”

While retail is the most important of the three primary drivers of freight activity and the most healthy, the others, construction and industrial production are flat to down. 

In 2018, the United States built more new homes than in any year since 2007, which sounds more ominous than it is because we still have not reached 2007 levels. In 2018 1.25 million new homes were built, but in 2007 that number was more than two million.

Industrial production, which grew 2.7 percent last year, has been essentially flat this year. Costello said that he was still bullish on North American industrial production — arguably a more important metric for freight given the integration of the American, Canadian, and Mexican goods economies — especially if the U.S. Congress manages to ratify the USMCA. 

Costello also addressed specific trucking industry metrics like volume, rates, and capacity. Contract market fundamentals look “ok” to Costello; any 2019 ‘freight recession,’ he said, was due to the utter collapse of spot market volumes and rates. In 2018, spot markets loads grew by about 100 percent year-over-year, but in 2019 they fell by about 50 percent year-over-year.

(Photo: FreightWaves)

One unexpected point that Costello made was that the ATA’s survey data shows that large fleets added just as much capacity as small fleets in the second half of 2018 and the first half of 2019, which put downward pressure on contract and spot rates.

Costello managed to transition from over-capacity to the ATA’s standard talking points on the driver shortage and said that if unchecked, the driver shortage could reach 160,000 drivers by 2028. The ‘driver shortage’ is largely based on the age and impending retirement of the average truck driver, who is about 54 years old. 

But note that we have not seen updated average driver age numbers since the capacity additions of 2018 and 2019. It is hard to believe that the new drivers who entered the industry and contributed to the oversupply of the market would have been as old or older than the average truck driver already in the industry. It’s likely that just as the tight labor market eventually resulted in wage inflation and additional capacity, it also stabilized or reduced the age of the average driver. 

More work needs to be conducted on the profile of the driver who enters the trucking industry during an inflationary freight cycle and how long they stay. We tend to assume that less experienced drivers have a harder time managing through a tough freight environment, and that the capacity might run-off in a ‘last in, first out’ pattern. But it’s unlikely that the newest drivers would own their own trucks or self-dispatch; instead, they’re probably company drivers. Additionally, it’s very possible that tough freight conditions could accelerate the retirement of the very oldest drivers who might have only stuck around for 2018 because of the favorable rate conditions that prevailed during that year. 

I remain skeptical of the claims of a chronic driver shortage in an industry that can add enough capacity in a twelve month period to completely alter the pricing environment.

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John Paul Hampstead, Director, Passport Research

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.