What cars and big rigs say about the economy
By Neil Irwin,
For an absurdly simple model of how the U.S. economy works, think of it as consisting of only two halves: cars and trucks.
Cars represent the demand side of the economy: The desire of Americans to buy the goods and services they want, need or enjoy. Trucks, specifically 18-wheelers and other big rigs, represent the supply side of the economy: The factories and shipping networks that make and distribute all those goods and services that consumers buy — including cars.
In the long run, these two sides of the economy have to move together. Without a successful supply side of the economy, people won’t have jobs and incomes. Without a successful demand side, nobody will buy the products that the supply side makes and distributes. The cars and trucks economies are two sides of the same coin. One man’s spending is another man’s income.
But these two sides of the economy can get out of whack for brief periods, which is what seems to be happening now. The crucial question for the economy is not whether they will converge — mathematically, they must eventually — but how.
The cars side of the economy looks to be on track. According to numbers released Friday, the University of Michigan consumer sentiment soared in October. The index rose to 83.1 from 78.3, and a similar consumer confidence index from the Conference Board also has shown optimism among American consumers in the past month. In a report last week, some 873,000 more Americans reported being employed in a survey that showed a steep drop in the jobless rate. And, appropriately enough for our metaphor, cars have been selling like gangbusters. September sales of autos and light trucks were at a 14.88 million annual rate, the highest since March 2008.
Big rigs aren’t doing so well. The trucks side of the economy looks somewhere between mediocre and miserable. Industrial production is down over the four-month period from May through August (the September number is due out Tuesday). U.S. factory orders were down a whopping 5.2 percent in August.
And these negative trends are particularly evident in the trucking sector. J.B. Hunt Transport Services, in Lowell, Ark., is the largest publicly traded trucking company. In third-quarter financial results released Thursday, its earnings were a penny a share below analysts’ expectations. Its “intermodal” business, which transports shipping containers by sea, rail or truck as needed, reported strong growth; the culprit was its trucking business, which transports goods around North America. That business shipped almost 2,300 fewer loads in the third quarter than it did a year earlier, a 2 percent drop. Its trucks traveled 6.6 million fewer miles while loaded in the quarter, a 12 percent drop.
J.B. Hunt isn’t alone. The Dow Jones transportation average is down 4 percent since the end of June, compared with a 5 percent gain for the Standard & Poor’s 500.
Less trucking activity, of course, means less demand for trucks. That is also evident from this week’s earnings. Cummins, an Indiana company that makes truck engines, said it will cut up to 1,500 jobs by the end of the year amid weakening demand. “As a result of the heightened uncertainty, end customers are delaying capital expenditures in a number of markets, lowering demand for our products,” Cummins chief executive Tom Linebarger said in a statement Tuesday.
And Alcoa, the giant aluminum company, cited less demand from the trucking industry as it downgraded its forecasts. “Heavy trucks and trailer,” Alcoa chief executive Klaus Kleinfeld said in a conference call with analysts Tuesday, is “down compared to the view that we had in the first quarter. North America is really driving it. We believe that heavy truck production will slow down in the second half of the year.”
If the cars side of the economy can stay buoyant, all will be well. Eventually, the trucks side of the economy will have to get into gear to keep up with all that demand for autos and everything else. But the risk is that all those cuts on the trucks side of the economy eventually mean convergence in the other direction — that those laid-off Cummins workers, for example, won’t be buying much this holiday season, and the trucking woes will get even worse.
The best thing to hope for, then, is that cars will take the economy for a ride.