Fleet Management

What, Me Worry About Higher Interest Rates?

April 2017, TruckingInfo.com - WebXclusive

by Evan Lockridge, Business Contributing Editor - Also by this author

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It was bound to happen again sooner or later, and it finally did last month – but this time there are more assurances it will happen again.

The U.S. Federal Reserve raised its benchmark interest rate by a quarter of a percentage point to 0.75% to 1%. This was only the third time since it raised it for the first time in nearly a decade in December 2015. While people are always concerned about the central bank hiking interest rates, there doesn’t mean there is cause for alarm. In fact, it’s actually good news this happened. But first let’s look at the biggest downside for trucking.

“Obviously financing costs will rise with the rise in interest rates, including for equipment and loans for expansions,” said Bob Costello, chief economist at the American Trucking Associations.

On the upside, the news means not only that the economy appears to be in good shape, but also could actually help economic growth.

While getting too crazy with interest rate hikes could be harmful to the economy, the Fed is emphasizing that it’s aiming for a gradual increase.

Before the first of these most recent three interest rates hikes occurred, Sandeep Kar, transportation expert for market research and consultancy firm Frost & Sullivan, told me such increases, especially coming back from historically low numbers, can “help the economy get on track for a more sustainable and robust recovery, which in the long term will be a good thing for the industry.”

Yes, interest rates on what consumers finance will move higher, from credit cards to mortgages. However, consumers have shown they are a resilient bunch. Retail sales in February, the most recent figures available, rose 5.7% from the same time a year ago, and housing has been one of the brightest spots in this economic recovery.

According to Costello, there are also positives for trucking and the economy that can come from interest rates being raised slightly from historically low levels.

“It will give savers, including retired people, more money and thus more purchasing power. Second, it will increase margins on bank lending, and thus lenders will be more likely boost credit for businesses and people. This in turn will spur economic activity,” he said.

Let’s think about part of that for a moment: retired people. It’s no secret we have an aging population with the graying of the baby-boomer generation. And while millennials are arguably the largest target audience for sellers of products and services, there are many indications they aren’t spending money in the traditional ways of their parents.

Lower interest rates have substantially hurt what some retirees have been able to spend, because many rely on interest income to supplement their retirement funds. While low interest rates and low inflation helped the housing industry recover after the bottom fell out, the latter also led to retirees getting a pittance of an increase in Social Security benefits for several years, again leading to less spending.

The one concern is how high will interest rates go. In announcing this latest hike the Fed indicated two more are likely this year, with more to come in 2018 and 2019. But as I mentioned earlier, it said it’s taking a gradual approach to get to its target of 3%. And that’s amid an economy that is expected to grow, slowly and steadily, around 2% GDP growth a year. Trucking will continue to benefit from that growth, even with slightly higher interest rates.

Evan Lockridge covers trucking business and economic news for HDT, both in his monthly column in HDT's Hotline section and on Truckinginfo.com. A freelance writer, he has been covering the trucking industry in print, online, and on the air since 1991.

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