Fleet Management

At A Snail's Pace: 2009 Economic Outlook

June 2009, TruckingInfo.com - Feature

by Deborah Lockridge, Editor, Editor in Chief - Also by this author

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A year ago, experts predicted we'd be turning the corner on the sluggish economy by now. They were wrong.Two things happened this year that economists didn't predict:
a huge spike in oil and fuel prices that dug deep into the wallets of consumers and businesses alike; and a credit crunch, triggered by the housing crisis, that spread further than most people expected.

The credit crunch has gotten so bad, last month the government stepped in and took control of giant mortgage companies Fannie Mae and Freddie Mac. Wall Street giants Lehman Brothers and Merrill Lynch were filing for bankruptcy and sold to Bank of America, respectively, while the federal government bailed out AIG.

The economy, as measured by Real Gross Domestic Product, shrank 0.2 percent in the last quarter of 2007 and only posted a 0.9 percent gain in the first quarter of 2008. Second-quarter GDP was much better, but may not reflect a real turnaround. Most predictions call for at least two more quarters of sluggish economic growth.

The Fuel Factor

Obviously fuel costs - with diesel hitting record highs of over $5 in some areas of the country over the summer - has hit the trucking industry hard. Fleets are responding by cutting top speeds, using computer programs to analyze and improve routes and driver habits, and assessing fuel surcharges. All these things have helped the industry weather the high prices much better than during the last downturn and fuel price spike in the 2000-2001 timeframe.

But fuel surcharges only cover about 75 to 80 percent of fuel cost increases. Chock the rest up to empty miles, out-of-route miles, reefer fuel, the difference between actual miles and billed miles, and fuel used while idling, points out trucking consultant Lana Batts, former president of the Truckload Carriers Association.

"The final [thing] adding insult to injury is the shippers don't pay for 30 to 45 days after you've actually paid for the fuel," Batts says. "So that's what the problem has been - the delta between what I'm getting in my surcharge and what I'm actually paying in fuel increases. And it's a cash flow problem for most carriers. Which is why you see factoring on the rise. Most carriers that are in trouble, it's not because the shippers aren't paying, it's because they're paying late."

But fuel costs have impact far beyond the cost to fill your trucks' tanks.

"In the U.S., we consume somewhere around 200 billion gallons of gas and diesel every year," explains Kenny Vieth, ACT Research's heavy truck and trailer market analyst. "So that means every penny increase in [fuel] price is $2 billion that is diverted from consumer spending or from business investment." And consumer spending makes up about 70 percent of the economy.

The good news is, fuel and oil prices have dropped from their dramatic summer highs.

"With oil prices coming down, and the speculators out of the marketplace, I think it's going to give a chance for consumers to recover and for profitability to come up a little bit for businesses," Vieth says.

However, experts say we probably will never see oil drop back down to $30 or $50 a barrel. Most say a price around $100 a barrel is probably reasonable for the near and medium term. Our experts cited numbers ranging from about $85 to $120 a barrel would be supported by "fundamentals" such as supply and demand and the value of the dollar.

OPEC will likely not take further steep declines in the price of oil lying down. Last month, OPEC announced members would trim the amount of over-quota production in an effort to keep prices from falling further.

In the long term, watch out. Charles Maxwell, senior energy analyst with Weeden & Co., told Barron's that the price of oil today should be between $75 and $115, but that between 2010 and 2025, we may face "a lack of sufficient power to drive our economy on an upward course." He predicts prices of $300 a barrel (roughly $250 in today's dollars) by 2015.

Credit Crunch

This economic downturn started with the housing sector bust. "Whenever something grows much faster than fundamentals like supply and demand dictate, you're going to pay for it later," explains American Trucking Associations Chief Economist Bob Costello. "When home prices went up an average 15 percent a year from 2000 to 2005, that was unheard of. It was the biggest housing boom probably in history, certainly in a couple of generations - and now we're paying for it."

The housing bust has had major repercussions in the financial markets. During the housing boom, banks made loans to many people they shouldn't have. Now it has gone 180 degrees in the opposite direction. "Now there's people that should be able to get credit that can't," Costello says. "That's what we call a credit crunch." And it has extended well beyond mortgages to credit cards and other types of personal and business loans.

"The Federal Reserve can cut interest rates as low as they want," Costello says, "but if banks and other financial institutions don't want to lend money, it doesn't mean a hill of beans."

In an interview a couple of weeks before the government bailout of Fannie and Freddie and the developments with Wall Street's big investment banks, John Larkin, who heads up transportation research at Stifel, Nicolaus and Company, explained that, "As long as little banks are failing, and people are talking about the need for bailout of Fannie Mae and Freddie Mac, as long as there's a question about what's going to happen to [global investment bank] Lehman Brothers, I think people are very, very cautious with respect to extending credit. And without credit, it's difficult for the economy to grow."

There was hope that the early September federal bailout of Fannie Mae and Freddie Mac (which together hold or guarantee about half of the nation's home loans) would help address this problem, bringing mortgage rates down and injecting needed confidence into the financial market.

As we went to press, the Federal Reserve and central banks in other countries were working to pump billions of dollars into the world's banking system to help strengthen the financial markets and boost investor confidence. How the crisis on Wall Street will affect Main Street USA as we head into 2009 remains to be seen.

Numbers Game

When trying to sort out what the economy is likely to do in the coming year, economists' jobs have been made more difficult by mixed messages from the usual economic indicators.

"It is a confusing time, because there seem to be a lot of contradictory data out there," says Ken Simonson, chief economist for the Associated General Contractors of America and a former ATA economist.

One of the biggest contradictions was the government's revision of second-quarter Gross Domestic Product growth from 1.9 percent to 3.3 percent. But our experts say that second-quarter GDP number is a bit misleading. For one thing, it partly reflects the economic stimulus checks from the government, a one-time boost. In addition, high exports and low imports boost the GDP number without really reflecting the bulk of the economy.

The weakness of the dollar compared to currencies abroad has helped bolster exports. That has made this downturn less painful than it otherwise would be, but not as painless as those second quarter GDP numbers seem to suggest.

"Now that we're not sending our money overseas, the GDP rises," explains Noel Perry, a consultant with Transport Fundamentals, Cornwall, Pa. "The question is, does that mean there's actually more freight moving?" The answer, most of our experts feel, is no. They also predict the growth of exports will slow along with the global economy.

Truck volumes are also making it hard to get a grasp on how things are going. The numbers "are very, very choppy," Costello says. "They look great one month and not very good the next, even week to week. That has been very reflective

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