In perhaps the least surprising conference over the past several months, Federal Reserve Chair Jerome Powell announced that the Fed was leaving its target interest rates untouched for now.
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At last Wednesday’s press conference, Powell reiterated the Fed’s commitment to make data-driven decisions in accordance with its “dual mandate,” which is to stabilize prices and secure maximum employment.
One of these things is not like the others…
But, in reality, fulfilling one half of the Fed’s mandate tends to be the most pressing concern at a given point in time. Right now, as has been the case for three years, that concern is inflation. So long as inflation is well above 2% yearly growth and the labor market does not collapse, the Fed will continue to focus on inflation.
Though we have already discussed December’s findings from the consumer price index — the figures that most think of when talking about inflation — the Fed relies on a different set of data: Personal Income and Outlays, which contains the personal consumption expenditures (PCE) price index.
The core PCE price index, which excludes goods with volatile pricing like food and energy, rose 0.2% from November and 2.8% from year-ago levels. Looking solely at goods, however, reveals that prices have remained flat from December 2023.
In fact, looking at durable goods — bulky items that move on trucks like furniture, large appliances, and automobiles — shows that prices have actually gone down 1.1% since the year prior.
Goods inflation is not terribly important to most economists, since two-thirds of consumer spending goes towards services: housing, healthcare, insurance, etc.
But goods inflation is important to consumers, who can vote with their wallet on whether to go out to the theaters (service) or to stay in and do some retail therapy online (goods). As the latter undergoes disinflation while the former’s prices keep rising, it becomes the more attractive of the two options, thus feeding truckload volumes.
Gross Pretty good domestic product
This example is not the only one in which the freight economy can be at odds with data from the broader economy.
Take, for example, Thursday’s release on fourth-quarter GDP. When talking heads analyze how the U.S. economy performed in a given quarter, GDP is most likely the number to which they are referring.
Most reports on GDP emphasized two important points: The U.S. economy’s growth was weaker than expected in Q4, but consumer spending was undeniably resilient.
Real (that is, adjusted for inflation) GDP rose at a seasonally adjusted annual rate of 2.3% in Q4. GDPNow, which is a forecasting tool run by the Federal Reserve Bank of Atlanta, had pegged 3% growth for the two weeks leading up to this release.
But strangely enough, that which caused GDP to miss its mark should be a blessing for carriers: Inventories for nonfarm businesses fell sharply in the quarter, which was a minus-0.89% drag on the headline number. [Imports are another line item that, when positive, pushes GDP down but is obviously good for truckers.] Meanwhile, consumer spending on durable goods boosted GDP by 0.85%.
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When you take these two findings together, it implies that businesses are heading into 2025 with lean inventories amid robust demand from consumers. This scenario is what led to the Great Freight Gold Rush of 2020-21, as shippers were willing to pay any cost to replenish their stock and sell those items ASAP.
Now, of course, it is unlikely that carriers will get a headwind like the global COVID pandemic any time soon. But, as the market rebalances and returns to its normal cycles, this combination of low inventory and high demand is exactly what should drive carrier rates higher.
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