Government surveys suggest rising tariff concerns and trucking shortage are affecting activity

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Demand in the economy continues to grow at a solid pace at the start of the 3rd quarter, but a myriad of government survey results suggests that trucking capacity and concerns over tariffs have limited the performance of several sectors.

Responses from the Federal Reserve’s Beige Book and data from regional business surveys continue to point to an economy that is growing at a healthy pace, as a pickup in consumer spending and continued strength in business investment  have sustained activity in the 2nd quarter. However, a, look at the details within the surveys suggest that demand in the economy is actually stronger, and the inability to find carriers to move the available freight has led to production delays and unfilled orders.

Beige Book shows modest to moderate growth, highlights tariff worries and trucking shortage

Responses from Beige Book survey again signaled modest to moderate growth in 10 of the 12 Federal Reserve districts, in line with results from the previous release. The only exceptions were the Dallas district, where surging energy production led to strong growth overall, and St. Louis, which saw a deterioration in growth conditions and reported only slight growth during the period.

Every district noted stronger consumer spending through June and early-July, and reported tight labor conditions as businesses in the economy scramble to find qualified workers. Chief among concerns during the period was the recent escalation of the US’ trade dispute with China and the implementation of tariffs. These developments helped push up input pricing pressures over the past several weeks and squeezed margins as companies struggled to pass on these costs to their end consumers.

Respondents in each district called attention to the tariffs, with one respondent from the Philadelphia district noting “that the effects of the steel tariffs have been chaotic to its supply chain—disrupting planned orders, increasing prices, and prompting some panic buying.” Several districts noted that the tariffs had not had a material effect on demand or business activity, however, with respondents from Boston citing “concerns about tariffs but none cited trade issues as affecting demand or hiring and capital expenditure plans.”

 A map of the 12 Federal Reserve Districts

A map of the 12 Federal Reserve Districts

Responses about trucking capacity pointed to a more direct effect on business performance. Six of the twelve Federal Reserve districts specifically called out the trucking industry’s capacity issues, noting that the shortage of commercial drivers had disrupted business activity in recent weeks.  Responses from the Richmond district signaled that strong port and manufacturing activity helped drive freight demand over the past several weeks, allowing carriers to raise rates significantly. One Virginia trucking company reported expanding operations in recent weeks, while another in North Carolina said that it would “if they could hire more drivers.”

Responses from other districts suggest that these capacity issues are continuing to eat into carriers margins. Respondents from the Boston retail sector reported dealing with their own labor shortage combined with the trucking shortage, saying “higher freight costs contributed to higher overhead costs and that a shortage of workers led to a 10 percent increase in labor costs compared to a year ago.” Participants in the Cleveland rail industry noted that volumes were particularly strong in recent weeks, in part helped by the shortage of trucking capacity in the economy.

Fed survey data highlight unfilled orders, rising price pressures

The anecdotal evidence from the Beige Book has been reinforced by recent Fed survey data. Regional diffusion indexes from New York, Philadelphia, and Richmond also show an economy that is growing at a healthy pace in July, although in New York and Richmond the pace is slightly slower than in the previous month.

 Regional indexes suggest manufacturing demand is robust

Regional indexes suggest manufacturing demand is robust

While there are some differences between the regional surveys, there are a few common themes that emerge from the different districts. In each case, the prices paid for inputs surged in July. This falls in line with the responses from the Beige Book, and signals that tariffs have continued to put a squeeze on margins for manufacturers. In addition, the outlook for future conditions deteriorated across the board, likely reflecting increased nervousness about recent trade feuds.

Results from all three districts also showed that manufacturers continue to struggle to fill orders in the sector. Data from the regional indexes showed that unfilled orders were rising in all three districts, with the Philadelphia district reporting almost a 14-point jump. This continues the recent trend of rising order backlogs and orders that cannot be processed, and would suggest that growth in the economy would be even stronger if only companies could find the workers , supplies, and capacity to meet all of the existing demand.

About the Beige Book and regional Federal Reserve surveys

Within government data, much of the “hard” data on output and spending such as GDP, retail sales, consumer spending, and industrial production relies on large national surveys that aim at tracking business activity. At a national level, broad indicators of economic health are released in a fairly timely fashion, with data updated within a month or two of the actual activity.

However, the more granular data that the government collects, either at a regional level or a more specific industry level, often faces significantly longer lags and gets updated less frequently than the broad national aggregates. As a result, there is often a real lack of timely insight on regional, state, or metro-area economic conditions (with a few notable exceptions such as employment data).

To alleviate this, the regional Federal Reserve banks take some measures to better understand conditions in their districts. The Federal Reserve’s Beige Book is summary of economic conditions across each of the 12 Federal Reserve Districts. Eight times a year, each Federal Reserve Bank collects anecdotal evidence on the state of the economy within its District. Responses are collected from Bank and District directors, as well as local industry contacts, economists, and other key market contacts. The Fed then collects and summarizes this information by district and sector.

In addition, each month many of the Federal Reserve banks conduct surveys on business activity within their districts and create indexes of performance. These indexes function much like the Institute of Supply Management’s diffusion index and give a good idea about different aspects of business performance. The regional results from the Richmond, New York, Dallas, and Philadelphia banks focus on the manufacturing sector and serve as one of the most timely views of manufacturing conditions in the economy.     

 

Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.