Article

Outlook 2010: Slow Turn Ahead

November 2009, TruckingInfo.com - Feature

by Deborah Lockridge, Editor, and Diana Britton, Managing Editor

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Skim the economic news headlines online, and they'll likely leave you scratching your head. What do all these numbers really mean?
Do terms like "less bad" and "bottoming out" really spell good news? Maybe big business brains know something. Look, FedEx's CEO predicts the economy will grow by 3 percent in the third quarter! But wait a minute - Verizon's head honcho says the economy is contracting, and there are no jobs being created.

To help you decipher what this all means to the trucking industry and to your business, we asked a group of well-known and highly respected analysts and economists that specialize in the trucking industry what they think all these numbers mean when it comes down to where the rubber meets the road: Lana R. Batts, managing partner of Transport Capital Partners; Charles W. Clowdis Jr. managing director (North America) in IHS Global Insight's Commerce and Transport practice; Bob Costello, chief economist of the American Trucking Associations; John G. Larkin, managing director and head of transportation capital markets research at Stifel, Nicolaus & Company; Eric Starks, president of FTR Associates; and Kenneth Wm. Vieth III, partner at ACT Research.

Here's what they had to say:

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Most economists are predicting we will see a positive number in the third quarter for Gross Domestic Product, a key indicator of the health of the economy. What do you think - have we seen the end of the recession?

Charles Clowdis: There have been some signs of bottoming out, but we still have a long way to go. We expect the return to be slow, coming back up in a "U" shape, rather than a "V." We'll see a turn, but it's not going to be a sharp one.

The Gross Domestic Product is still at low levels, and we don't expect it to pick back up significantly until the fourth quarter of 2010. In the first quarter of this year, GDP was down 6.4 percent, compared to being down 1 percent in the second quarter. We anticipate it to be up 2.4 percent in the fourth quarter of this year, and up 1.8 percent in the first quarter of 2010.

Bob Costello: Yes. But while the third quarter GDP is going to be pretty good, that's partly attributable to Cash for Clunkers. So you're going to see a solid third quarter number, and then the rate of growth is going to slow and go all the way back down to under 2 percent, from nearly 4 percent. I don't think there's any more contraction coming. But there will be slow growth before it starts to ramp up to historical average of nearly 3 percent.

John Larkin: No, because the recession is an economic period that is not defined by politicians and pundits. It's determined by the National Bureau of Economic Research, which has said the recession is not over because of the rate of unemployment.

Right now, there is no catalyst to get the consumer moving. The stimulus has provided some signs of a recovery, such as the Cash for Clunkers program, but these things are not sustainable. It may have artificially spurred demand.

Eric Starks: I do think we've hit a bottom and that things will start creeping back up. Things such as production, automotive numbers and housing have all hit a bottom. The GDP should be modest in the third quarter. I think the declines are behind us.

Kenny Vieth: This piece of it, I think. Certainly we should have some pretty healthy growth in the third quarter, in the 3 to 4 percent range. In our model, we think that the economy should be moving forward from this point, at a slower rate of growth.

It's not what our model says, but I do think there is a risk at the end of 2010 where we could go into a double dip recession, as the stimulus dollars have run their course and the economy has been left on its own to succeed or fail.

What has made this recession different from others? How does that affect the recovery?

Batts: I think we're looking at a new type of economy. Because of the housing bust, because of the financial crisis and the credit crunch, I think this conspicuous consumption, this excess consumption, is over. People in the past would have bought something without thinking about it. Now they say, I don't need that. The savings rate is going up. People are asking themselves, do I really need more stuff? Well, stuff is tonnage.

Clowdis: Too many economic elements came together at one time. The fuel price surge of last summer has had a lingering effect. A lot of freight moved to intermodal. Owner-operators could barely make a living. As a result of the credit crisis, lenders stopped looking at truckers as good borrowers. Not to mention the crisis on Wall Street and the bank failures, which fueled much uncertainty. In addition, unemployment continues to linger. We expect the unemployment rate to increase slightly to around 10 percent in the first half of 2010, and slowly decline to about 8 percent at the beginning of 2012.

Costello: No two recessions are the same. This recession was the longest and deepest in the post war era. It was also financially driven. Historically we know that when a recession happens to be financially driven, that the recoveries are slower than normal.

We also saw an unprecedented increase in inventories relative to sales. If you ask a shipper what they did with their inventories, they'll tell you they reduced them. The problem is, their sales fell by significantly more than their inventories, which means they still had too much inventory on hand, which means we'll have to work off those inventories. Which means trucking will not lead this recovery.

Larkin: The consumer makes up two-thirds of the economy. In past recessions, the consumer continued to spend. However, with the housing crisis, credit worsening, and pay cuts, consumers have to find a new level of spending. People are currently ramping up their savings rate to something like 5 or 6 percent, whereas it used to be zero. This takes 5 or 6 percent off of consumer spending.

Starks: This recession has been so deep contraction-wise. The transportation industry has been in it for so long, as the declines really started in mid-2006.

On a macro-economic level, this recession is not inflation-based. The fundamentals of the downturn are based on banking and credit.

This recovery is likely to look different. The rate of growth will be harder to get because consumers are sitting on the sidelines and so many jobs have been lost. While businesses may continue to stabilize, there will not be a strong demand for their products. It all depends on how long the consumer will stay out of the market.

Vieth: Rather than your typical inventory-correction recession, this really is a financial recession, where credit dries up. And consumers have too much debt to spend us into a quick recovery.

If we look at household debt as a percentage of GDP, in the first quarter, it was 107 percent. If you look at the historical norm, it ranges from 40 to 60 percent. We have to get rid of some of that debt. So consumers are saving more. If they're saving more they're not spending more. And spending is freight.

What key economic indicators affect trucking? What are they telling us?

Clowdis: The key is consumer spending. People are replacing the RV and mountain home purchases with things they absolutely need, such as a new water heater or refrigerator.

Consumers are scared. As a result of consumer debt, the savings rate has jumped from 2 percent in 2008 to 5.2 percent in the second quarter of this year. I expect people are going to put even more money in their savings accounts in the fourth quarter, and spend less during the holiday season.

For the trucking industry, this pent-up demand is key to coming out of the recession. When consumers return to the stores and start saying, "I need to buy Nikes instead of Keds," the people who ship these goods will start to reap the benefit.

Larkin: Some of the key indicators incl

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