Commentary: Industrial America still matters!

FreightWaves is providing a forum – Market Voices – for a number of market experts. 

Last week I wrote about why the ongoing decline in lumber shipments and the ongoing decline in housing starts should be a growing concern, and that continued contraction in this industry had several significant waves of secondary and tertiary economic effects. 

So, when a smart young Wall Street portfolio manager was dismissive regarding my concerns about the contraction in industrial production (“Come on, this is more and more, to an ever-increasing extent, a technology and service economy. How much should I really care about industrial America? Does it still matter?”), I became inspired to explain (just as it is true in housing) that industrial production has implications much broader than what is experienced by those who still wear a hard hat and steel-toed boots every day.

A little reminder/background – the extraordinary advancements in fracking technology were developed by U.S. companies and the “breakthrough moment” was in February 2009. The 2009 through 2014 timeframe became the first “industrial-led economic recovery” in the U.S. in almost 50 years. In 2008, the U.S. was the third-largest producer of oil, behind Saudi Arabia and Russia (both of which individually produced about 40 percent more than the U.S. did). In addition, the U.S. was also the world’s biggest importer of oil (importing almost twice as much as the nation produced). Fracking changed that equation. U.S. production of oil and natural gas exploded, and U.S. production surpassed first Russia and then Saudi Arabia. As the United States became the world’s largest producer of oil and natural gas, its petrochemical industry and its infrastructure was first upgraded, and then expanded as eight new refineries were built in the U.S. By the end of 2018, the U.S. became a net exporter of oil and refined fuels for the first time in decades.

It is important to note that during this powerful 10-year economic transformation, per capita consumer income growth averaged an anemic 1.5 percent per year. This growth statistic appears even more feeble when the severity of the 2008-2009 recession and the fact that the strongest growth in consumer income, did not occur until recently. The reality is that, after the most severe recession since the Great Depression, there was no consumer income recovery for more than five years, as the average increase in per capita consumer income grew by only 0.46 percent per year (2008 through 2013).     

So, when the nominal level of Industrial Production (available on SONAR under the symbol IPRO.USA) begins to steadily sequentially contract through the first four months of the year…

FreightWaves SONAR

And, when the rate of year-over-year percentage growth in Industrial Production (available on SONAR under the symbol IPROG.USA) begins to first weaken and then plummet…

FreightWaves SONAR

I begin to grow increasingly concerned. After all, industrial production was the main driver of U.S. economic expansion and prosperity over the last 10 years, and it is both responsible and under-appreciated for so many of the current positive underpinnings to the U.S. economy. 

Without it:

  • What would the value of the dollar be relative to other currencies? 
  • What would the balance of trade be, without the U.S. development of fracking technology and the dramatic expansion of the U.S. petrochemical industry? 
  • How much more beholden, or held hostage, would the U.S. be to other countries that are in a spectrum that ranges from: even at its most benign end, highly volatile and/or run by a dictator/monarch/mobocracy; to at its most malignant end, outright hostile to the U.S. and its citizens, pledging to “kill us” on a regular basis?

“Enough platitudes, what about its effect on trucking?” the audience asks. Fair question, and here is my answer – between the slowdown in construction, which I wrote about last week, and the overall decline in Industrial Production, the flatbed trucking sector has experienced a whiplash in marketplace dynamics in the last six weeks. As a flatbed industry insider described it to me yesterday, “We have gone from asking for price increases, to asking to be partners with our customers to maintain current levels of load volume by keeping pricing flat, to begging and asking how much we needed to cut price in order to get loads.” 

One of the clearest illustrations of this rapid marketplace deterioration is represented in real-time by the DAT Flatbed Freight Weekly Barometer (available on SONAR under the symbol DFBF.USA). 

FreightWaves SONAR

While it was not at the extreme, demand exceeds capacity levels, experienced in mid-2018. In the 55 to 60 range, through the first three and one-half months of the year, it still reflected a marketplace in which demand exceeded capacity by a large enough margin that modest price increases could be asked for and received. The DAT Flatbed Freight Barometer was 55.6 on April 20th, before it began steadily declining and falling below 50 to 49.5 on May 25th.

Bottom line – the volume of and rate of growth in Industrial Production is still important to the U.S. economy, and arguably more important than it has been for many decades. The current decline in Industrial Production coupled with the contraction in housing is proving to be a recipe for increasingly tough times for truckers pulling a flatbed trailer. With no catalyst to turn the current trends, my outlook continues to grow increasingly bearish.

Stay tuned…