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American Shipper

Chamber: U.S. economy won?t reach potential in ?11

Chamber: U.S. economy wonÆt reach potential in Æ11

   The U.S. economy will grow 3.2 percent and create 2.4 million to 2.6 million jobs in 2011, but faster growth is necessary to put millions more to work and move past the bumpy post-recession recovery phase that has been going on for 18 months, the U.S. Chamber of Commerce said last week.

   Government figures in the near future will likely show that the gross domestic product expanded more than 3 percent during the fourth quarter of 2010, said Martin Regalia, the chamber's chief economist, during a Jan. 11 panel discussion following the annual 'State of Business' address by President Tom Donahue.

   The chamber projects growth in the 3 percent to 3.5 percent range for the first half of the year and 3.5 percent in the second half, Regalia said.

   But until the economy is consistently growing above 3.5 percent consumer demand will not be robust enough to generate jobs 'and create a self-sustaining period of economic growth,' he said.

   U.S. GDP was 2.6 percent in the third quarter and 1.7 percent in the second quarter of 2010.

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   The nation needs to create 1.2 million jobs per year just to stay even with new entrants to the work force. Putting 2.5 million people to work will only drive the unemployment rate down 1 percent, and many economists believe the unemployment rate is understated because many people have given up looking for work.

   The unemployment rate in December fell to 9.4 percent from 9.8 percent, according to the Commerce Department, but some of the improvement can be attributed to seasonal hiring for the holidays.

   On Friday, the Commerce Department reported that retail sales grew in December for the sixth consecutive month to $380 billion, exceeding the previous monthly record reached in November 2007. Retail sales were 0.6 percent more than in November and 7.9 percent more than in December 2009. For the year, retail sales were up 6.6 percent.

   The United States has rebounded quickly from several past recessions, but this time growth of disposable income is inconsistent and holding back consumption, which drives two-thirds of the economy, economists on the panel said. Instead of steadily climbing out of the downturn, the economy has been characterized by fits and starts.

   Factory utilization is only in the low 70 percent range, and corporate investment in plants doesn't usually occur until utilization rates are above 80 percent. Despite a replenishment phase in the fourth quarter of 2009 and the first quarter of 2010, inventory restocking is not likely to provide a consistent boost to the economy without more consumer demand, Regalia said.

   Exports were a strong component of U.S. output last year, but economic problems in Europe and changing currency rates mean the United States can't depend on the trade sector to drive the economy, he added.

   Meanwhile, the weak housing market continues to be a major drag on the economy, economists agree.

   Home sales will rise 10 percent this year and housing construction will pick up 20 percent, helped by the most affordable housing levels in 40 years, a gradual increase in household formation and rock-bottom mortgage rates, predicted Frank Nothaft, chief economist for Freddie Mac. Housing prices should finally bottom out by the middle of the year as the excess, vacant inventory of 1 million existing homes begins to decline.

   The expected construction level is not as good as it sounds because the growth is coming off a very low base, he noted.

   The herky-jerky nature of business activity is reflected in the trucking industry, which experienced a 15 percent decline in volumes from its peak in mid-2006, said Bob Costello, chief economist for the American Trucking Associations. Motor carriers made back some of the lost ground with almost 6 percent growth in volumes last year, but still face an uncertain business climate.

   Shipment levels from customers that normally move a consistent amount of product week to week, are now fluctuating, which can be attributed to companies trying to find the right inventory levels, Costello said.

   Within trucking, the tank truck sector improved the most between January and November of last year. Tank truck volume increased 10.7 percent, as chemical production ramped up to meet manufacturing needs, he said. Volumes for temperature-controlled units grew 3.7 percent (on par with the steady state of the sector and food consumption during the recession), while flatbed and dry van volumes were up 4.9 percent and 2.8 percent, respectively.

   Trucking companies held off investing in new equipment during the downturn, but economic conditions are making it extremely difficult for them to buy replacement tractors, Costello said. The desire for new rigs is due to high maintenance costs as trucks get older, more so than demand for additional capacity.

   But a rebound in heavy-duty truck sales, which have plunged in recent years, has been slow to materialize because new trucks are much more expensive, used truck residuals are lower and financing is more difficult to obtain, the ATA official said.

   A new truck cab costs about $120,000 today versus $95,000 in 2006, mostly due to 2007 and 2010 federal government requirements for high-tech engines that produce much less particulate matter, nitrous oxide and other pollutants. The value of a used truck at trade-in is $40,000 compared to $50,000 four years ago. That means a trucker has to finance $80,000 instead of $45,000 at a time when volumes are down and banks have stricter lending criteria.

   'So here you have an industry that really needs to be buying new trucks and certainly could help the economy, but we are struggling to do that,' Costello said.

   Class 8 truck sales, which plummeted to about 134,000 units in 2008, should improve this year over 2010, but will still be relatively low, he added.

   Sales already are starting to pick up steam, according to ACT Research, which tracks the commercial vehicle market. Net orders for Class 8 tractors and trailers surged in the fourth quarter, with a 115 percent increase in December compared to the same month in 2009. With 71,000 orders, it was the best quarter for truck makers since the second quarter of 2006. ACT projects full-year 2010 production of heavy-duty trucks to be 154,500, up 31 percent from a weak 2009 but still well below normal replacement demand. It estimated that by 2012 truck makers will produce more than 300,000 units.

   'The combination of rising freight volumes, improving trucker profits, rising used equipment values and the oldest North American fleet on record, have led to a resurgence in demand for new commercial vehicles,' ACT President Kenny Veith said in a statement. 'The biggest constraint in 2011 will be the ability of equipment manufacturers and component parts suppliers to ramp up production fast enough. As a result, the up cycle is expected to last through 2013.'

   Demand for diesel fuel, which comprises a huge component of trucking costs and is indirectly correlated to broader consumer spending, was up 4 percent in 2010 after hitting a low in 2008, said John Felmy chief economist for the American Petroleum Institute.

   Prices for crude oil and gas are up about 26 cents in the last two months, and about 42 cents for the past year. Diesel prices increased 49 cents per gallon last year.

   As fuel prices rise, individuals and companies have less disposable income available to spend on other goods and services.

   The rise in crude prices has been spurred by demand in other parts of the world. Worldwide demand increased by a record amount of 87 million barrels per day last year, according to the U.S. Energy Information Administration. Crude oil prices rose 21 percent in the second half of last year, and finished last week at over $91 per barrel, as a Federal Reserve report that U.S. factory production increased 0.8 percent in December led to expectations of increased fuel demand.

   The agency's 2011 outlook, released Jan. 11, calls for West Texas Intermediate crude oil to average about $93 per barrel, $14 higher than last year, and rise to $99 in 2012. Retail gasoline is expected to average $3.17 per gallon, 39 cents per gallon higher than in 2010, and reach $3.29 per gallon in 2012. But futures markets and options contracts suggest that there is more than 25 percent probability that gasoline prices will exceed $3.50 per gallon in the peak summer driving season this year.

   Last week, the average price for regular gasoline increased 9.3 cents to $3.08 per gallon.

   In his speech, Donahue said the nation's largest business federation will conduct an analysis of government and businesses activities to find out what policies and strategies do the best job of creating jobs, innovation and investment, and what factors hinder competitiveness, compared to other countries in the world.

   'On our current course, it could take years to get back to where we were before the recession and the financial crisis hit ' To succeed, we must work to enact policies that will sustain and accelerate economic growth by removing regulatory uncertainty and doubling U.S. exports over five years,' he said. ' Eric Kulisch

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