• DATVF.ATLPHL
    1.643
    -0.074
    -4.3%
  • DATVF.CHIATL
    1.951
    0.018
    0.9%
  • DATVF.DALLAX
    0.880
    0.015
    1.7%
  • DATVF.LAXDAL
    1.501
    0.007
    0.5%
  • DATVF.SEALAX
    0.966
    -0.092
    -8.7%
  • DATVF.PHLCHI
    0.929
    -0.038
    -3.9%
  • DATVF.LAXSEA
    2.005
    0.035
    1.8%
  • DATVF.VEU
    1.508
    -0.031
    -2%
  • DATVF.VNU
    1.395
    -0.016
    -1.1%
  • DATVF.VSU
    1.191
    0.011
    0.9%
  • DATVF.VWU
    1.486
    -0.028
    -1.8%
  • ITVI.USA
    9,836.710
    -180.070
    -1.8%
  • OTRI.USA
    4.790
    0.100
    2.1%
  • OTVI.USA
    9,831.280
    -180.470
    -1.8%
  • TLT.USA
    2.410
    -0.010
    -0.4%
  • WAIT.USA
    150.000
    0.000
    0%
  • DATVF.ATLPHL
    1.643
    -0.074
    -4.3%
  • DATVF.CHIATL
    1.951
    0.018
    0.9%
  • DATVF.DALLAX
    0.880
    0.015
    1.7%
  • DATVF.LAXDAL
    1.501
    0.007
    0.5%
  • DATVF.SEALAX
    0.966
    -0.092
    -8.7%
  • DATVF.PHLCHI
    0.929
    -0.038
    -3.9%
  • DATVF.LAXSEA
    2.005
    0.035
    1.8%
  • DATVF.VEU
    1.508
    -0.031
    -2%
  • DATVF.VNU
    1.395
    -0.016
    -1.1%
  • DATVF.VSU
    1.191
    0.011
    0.9%
  • DATVF.VWU
    1.486
    -0.028
    -1.8%
  • ITVI.USA
    9,836.710
    -180.070
    -1.8%
  • OTRI.USA
    4.790
    0.100
    2.1%
  • OTVI.USA
    9,831.280
    -180.470
    -1.8%
  • TLT.USA
    2.410
    -0.010
    -0.4%
  • WAIT.USA
    150.000
    0.000
    0%
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Commentary: Does the GDP Matter?

FreightWaves features Market Voices – a forum for market experts with unique knowledge of numerous transportation/logistics/supply chain sectors, as well as other critical expertise.

Transportation, especially trucking, is a cyclically sensitive industry. The most successful truckers and freight brokers are at the top of their profession with a wealth of information and wisdom about the industry. They are often also very good negotiators, with highly developed sales skills, and gifted in their ability to motivate and inspire others. All the talents you’d expect in most successful people in any industry, but they often have another skill that isn’t typically found in other industries. Successful people in the transportation industry are frequently pretty decent economists as well. Perhaps it is because they are so close to the freight flows, which are the heartbeat of the economy. Perhaps it is because they have to learn how economic cycles ebb and flow, just to survive. Whatever the reason, they often know, or at least sense, both the magnitude of expansions and contractions, and the changes in direction of the economic cycle, long before the economists who are academically trained or employed by Wall Street or financial institutions begin to become aware. 

Bottom line – when presenting your economic outlook to professionals in the transportation industry, you better bring your ‘A’ game.

So, if transportation professionals are managing a cyclically sensitive business and most of them are pretty decent economists, why don’t they pay more attention to the reporting of the gross domestic product, or GDP? Should they be learning anything from it? What, if anything, should they be looking at?

To get a decent answer to these questions, it is important to understand how GDP is calculated, what it was designed to measure and why. 

First a little history…

The methodology used to calculate GDP was developed in the 1930s, as the U.S. struggled through the Great Depression. The intention was that if we better understood and measured what was happening in the economy, we might be better able to manage it, to enable it to produce more prosperity for everyone. It was a noble endeavor that did produce many benefits, but as our economy has changed in the 80 years since, some of the GDP calculation methodologies have become irrelevant or even counterproductive. Two of the most glaring examples are the way inventories effect the calculation of the GDP, and the way imports and exports effect the calculation of the GDP. (I will dissect the imports and exports in a future column.)

Using the current methodology, all increases or decreases in the value of the private inventories held (categorized as “Farm” and “Non-farm,” which is a hint to how long ago this methodology was created) result in an increase or decrease, respectively, in the GDP. As a side note – in the 1930s farmers were 24.8 percent of the U.S. population (they comprise 1.3 percent of the population today) and produced more than one-third of U.S. exports. (That 1.3 percent of the population still produces 20 percent of U.S. exports.) 

What about now?

With the ongoing development of supply chains, the technology used to manage inventory, and the steady increase in goods that are ‘made to order’ (created exactly as the specific customer requested), our outlook has transformed from viewing the accumulation of inventory in the warehouse as “the building up of wealth stored by our nation” to doing everything possible to reduce inventory at every point in the supply chain. Now, we are focused on never having more inventory than is needed, and now understand that excess inventory has a carrying cost, and is the opposite of ‘made to order.’ As transportation professionals are painfully aware, the larger inventories become, the further we are removed from each purchase, each moment of consumption, resulting in the need to pull goods through the supply chain all the way from the raw material stage to the final product delivered. In the 1930s, more inventory was more wealth. In 2019, more inventory is not more wealth and instead delays much of the commercial activity that creates economic wealth. Nevertheless, in the calculation methodology still used today, we continue to consider increases in inventory as increases in GDP. 

What should transportation professionals do?  

It is relatively simple. When the GDP number is released, go to the Bureau of Economic Analysis (BEA) website and click on the link that says “Full Release & Tables.” Scroll down through that document to the page that lists the “Contributions to Percent Change” (usually page 8) and find the line item for “Change in private inventories.” Subtract that number from the number reported and you will have taken the first step in adjusting the reported GDP number from one that isn’t as relevant or useful in today’s economy, to one that is a much more useful gauge of how the overall U.S. economy is performing. 

Recent examples of this adjustment:

  • In the first quarter of the year, the GDP was reported as 3.2 percent initially, and then revised down to 3.1 percent. Both numbers seem stronger than the economy most of us experienced. Inventories grew in the first quarter and added 0.60 percentage points to the calculation. Subtracting the increase in inventories takes the GDP down to 2.5 percent, which is closer to the level of activity that most of us experienced in the first quarter (and certainly if you were in the transportation industry, what was experienced).
  • In the second quarter of 2018, the GDP was reported as 4.2 percent, which is a strong number but less robust than many of us experienced. Inventories fell in the second quarter of 2018 and subtracted 1.17 percentage points from the calculation. Adding the decrease in inventories back into the GDP takes it up to 5.37 percent, which is closer to the booming level of activity that most of us experienced (and certainly if you were in the transportation industry, what you experienced in the second quarter of 2018).

Bottom line – while some of the calculation methodology of GDP has become outdated, with a few simple adjustments, it can serve as an additional benchmark and reliable economic indicator for all of us in the transportation industry.

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Donald Broughton, Principal & Managing Partner, Broughton Capital

Prior to starting Broughton Capital Mr. Broughton spent nine years as the Chief Market Strategist and Senior Transportation Analyst for Avondale Partners. Before that, Mr. Broughton spent over twelve years at A.G. Edwards. At A.G. Edwards, in addition to being the Senior Transportation Analyst, he was the Group Leader of the Industrial Analysts and served on the firm’s Investment Strategy Committee. Prior to going to Wall Street, Mr. Broughton spent eight years in various distribution and operations management roles in the beverage industry, including serving as the Corporate Manager of Distribution for Dr. Pepper/Seven-Up companies and Chief Operating Officer for Bevmark Concepts.

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