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February 11, 2020 3:00 PM, EST

ATA’s Bob Costello Cautiously Optimistic on US Economy, Trucking

ATA Chief Economist Bob Costello at an industry event in 2018. At NATSO's 2020 convention, Costello said he doesn't think the economy will begin a recession anytime soon. (John Sommers II for Transport Topics)

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AURORA, Colo. — It is unlikely in 2020 both the U.S. economy and the trucking industry will soar to the levels they did in 2018, but that doesn’t mean the year won’t see adequate growth to continue the expansive economic recovery.

That was the message of American Trucking Associations Chief Economist Bob Costello to attendees of the National Association of Truck Stop Operators’ annual convention Feb. 9.

“I’ve got some pretty good news for you relating to the economy,” Costello said. “We are in the late stages of this economic cycle, the late innings of this game, the eighth or ninth inning. But here is the good news, this one is going to extra innings.”

Costello said that after 10-plus years of record expansion, he believes it is unlikely the U.S. economy will slip into a recession late this year or in 2021. However, gross domestic product growth, which was 2.9% in 2018, is slowing.

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“We’re going to transition from above-trend growth to average, or below-trend growth, he said. “Our long-term growth potential is about 2%, but in 2018, we grew nearly 3%, last year 2.3%. We’re transitioning to closer to that long-run growth rate. But here’s the good news, that means it’s more sustainable, and inflation won’t get out of hand.”

Costello said that in 2017 and 2018, economic growth was fueled by the 2017 rewrite of the tax code and the Trump administration’s efforts to deregulate parts of the economy, including trucking. But those stimuli, he cautioned, are wearing off.

“The Federal Reserve helped us. Just over a year ago, we were talking about how many times the Fed was going to raise interest rates. What did they do last year instead? They dropped rates three times. That saved us in many ways,” Costello said.

With regard to trucking, Costello said there has been a slowdown, specifically because the industry is closely tied to manufacturing, and manufacturing has been impacted by the Trump administration’s trade battles with China.

“Manufacturing activity has been in a recession,” he stated. “We were increasing nicely, and then what happened? This administration, this president decided to take on China. I am not going to make a judgment on that, but what it did do is, when these tariffs were announced, a lot of businesses ordered as much as they could prior to that. So, warehouses got full, and production started to come down.”

But Costello pointed out contract rates have remained stable, and it is spot rates that have taken the biggest hit, especially when compared with 2018.

“The part of trucking that is in a recession is in the spot market,” he said. “Contract rates, those long-term rates with shippers, that actually grew 2.3% last year, where the spot market was off 32%.”

Costello estimates that 75% of the trucking industry is tied to contracted freight, and the rest is spot freight.

“The spot market has been tough,” he said.

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Because of the steady growth of e-commerce, Costello said the trucking economy is shifting to more regional and less longhaul deliveries, pointing to figures showing the average miles driven has decreased from 800 per day in 2000 to 505 in 2019.

“We continue to spend more and more buying stuff online,” he said. “And as we do that, the average length of haul shrinks because in order to meet our demands of getting stuff in two days or less, we have to have warehouses all across the country, and the freight has to be nearby.”

Costello said he believes 2020 won’t set records, but for the trucking industry, it will be an improvement over 2019 — especially as trade conditions improve as a result of the new U.S.-Mexico-Canada Agreement, and a lessening of tensions between Washington and Beijing.

“I think by the time you get through the second quarter, supplies should start to correct themselves,” he added. “With this deal with China, a phase one, starting to implement or getting closer to implement USMCA, manufacturing picking up a hair, I think things will get better.

“They’re not going to be 2018 good, but they will start to improve. And by the second half of the year, the industry will start to feel better.”

But Costello added there is one uncertainty economic forecasters are just now factoring in. It concerns the spreading of the coronavirus in China and other parts of the world. He says it’s not clear yet what the virus will do to China’s economy. In 2002 and 2003, when the SARS virus hit southern China, the country accounted for only 4% of world GDP. Now it accounts for 16%.

“Normally, factories in China shut down for the Chinese New Year for about 10 days. Well, they may be shutting down for 30 days or more,” he said. “You still have to look out for something.”

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