Due to recent budget cuts…the light at the end of the tunnel has been turned off
After reading my most recent blog on the state of our economy, an industry supplier friend joked that would be a fitting way to describe my rather pessimistic outlook. Others wrote in saying I was overly pessimistic.
Could they be right? Is there good reason to believe we are finally able to see light at the end of the tunnel when it comes to the economic downturn? There’s much at stake for both transportation providers and those purchasing their services if we can. Transportation is a leading indicator of future economic activity. Freight starts to move, and the fortunes of transportation providers start to improve, about six months before the economy does as businesses anticipating improved sales start to rebuild their inventories. And an uptick in freight volumes signals the beginning of the end of excess capacity and depressed transportation rates.
Is this where we are right now? If the current recession in the US, which of course has an incredible impact on Canada since almost 80% of our exports are absorbed by the US market , lasts into April — as it almost surely will — it will go on record as the longest in the postwar era. The 1981-82 and 1973-75 recessions each lasted 16 months.
I certainly didn’t think we were about to see the light at the end of the tunnel when I wrote a blog on the subject just a few weeks ago. I started the month with a pessimistic blog on the North American economy basically stating that any light at the end of the tunnel was basically a mirage. For example, I argued that hopes of a recovery based on the reports of US truck tonnage showing a spike in January were nothing more than wishful thinking. US truck tonnage did spike 3% in January but the month looked so good only because December’s numbers were so awful. Put the spike in perspective, I pointed out, and you see why there’s no reason to be optimistic: compared to the previous January, the month was down 10.8%; and the month’s tonnage was the second lowest since October 2002.
Well, a month later, I’m not about to say I’ve completely changed my mind, but let’s just say I’m willing to be persuaded. What happened? The combination of finding optimism in quarters where I did not expect to find it and an upturn in the economic indices I normally keep tabs on.
Every year at this time I have the privilege of speaking to the leaders of some of the nation’s best managed transportation companies for our annual Award Winning Suppliers special in Canadian Transportation & Logistics. I fully expected pessimistic responses to my probing about current economic conditions and forecasts and I did get some. But I was surprised to find some degree of optimism that things could start to turn around as quickly as the second quarter.
I then started seeing some key indices showing notable improvement. The Baltic Dry Index is an assessment of the price of moving raw materials on cargo ships around the world. It’s an important indicator because raw materials start moving when infrastructure is being built and manufacturers expect to be producing products to meet new demand.
When the world economy is fading, shipping gets cheaper. When growth returns, shipping costs more. I made much of the fact that the Index had sunk to a 22-year low in December in my previous blog. But since then it has shown improvement, which would indicate we may have already hit rock bottom and things will start to pick up from here.
Also the US Economic Cycle Research Institute’s Weekly Leading Index — a composite of daily and weekly data on economic drivers of the business cycle, including corporate profits and housing activity – has enjoyed some stabilization since the start of the year.
And then there’s the big one: consumer spending, which constitutes about 70% of the US economy. Consumer spending rose 0.6% in January, after a 1% decrease in December and a 0.8% drop in November.
So does all this mean we can finally get optimistic about a turnaround? Perhaps. A couple more months of improving indices would be better but, as I mentioned earlier, I’m ready to be convinced.
Have your say
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Lou… I love your blog. I read it nearly every week. I generally respect your analysis of the trucking industry. The knowledge you have on the indices is informative and insightful. Though we sometimes don’t view things the same or even believe the same things about events I respect your position regardless. There are some things though I’d like you to consider in your estimation of a “recovery”.
Too many people view the great depression as a landmark economic event and compare it to the numerous cyclical subsequent recessions. There are several major factors that contribute to any recession/depression: political philosophy, monetary policy (treasury), national debt (held within the confines of a country both consumer and government), international debt, population density/growth/dynamics(age-wealth etc), infrastructure, public sentiment (consumer confidence), availability of capital… just to name a few. It would be safe to assume that the great depression will never occur again because the political and monetary policies have forever changed dramatically.
Concluding or projecting the end of a recession based primarily on trucking indices and consumer confidence is reasonable if all other major factors are consistent or at least predictable. Unfortunately, they are not! This means recovery is dependant on external factors outside the typical cyclical means (ie. consumer confidence). In our situation the “external factors” of the normal business cycle is in serious crisis.
The US federal government is in DEEP financial debt and they are refusing to acknowledge their position (as Canada did nearly 15 years ago, thanks to Paul Martin’s balanced budget). The US however, just keeps borrowing and borrowing. The US Federal Reserve is printing money (now called quantitative easing) like no other country in history (actually not true: Germany after WWI, Russia, Argentina, Zimbabwe and the Roman Empire just before it fell). Once a country starts printing money at the rate the US is now “quantifying” very few have been able to stop it (Japan was able to in the nineties but they are still suffering from it and had a COMPLETELY different political and social environment). The US is accustomed to consuming not sacrificing, if they dramatically change they MAY JUST save themselves.
However, evaluating the US political policy shows no sign of reduced deficits. In fact they are escalating and promoting their national debt at historic levels. If they continue in this policy the net long term financial result will have to be hyperinflation with the devaluation of the US dollar (incidentally the Bank of England just starting printing money at unprecedented amounts also). There is a very strong possibility that the entire world economy will be in a global currency crisis within 1-5 years.
Things to look for in the media in the next few years are: hesitancy by international bodies to purchase US T-bills, increased interest rates to entice T-bill purchases, huge swings in political policy (protectionism, trade wars, international monetary restrictions and disputes), a lot of talk about IMF intervention, the moderate to heavy nationalization of banks and insurance companies, a search for a financial stabilizer such as gold (or another currency) just to name a few.
Considering these added major factors the trucking industry will show varying signs of both recovery and further recession. Consumer confidence may tank to historic lows and iritic highs for many years. The economy may very well lurch and depress for many quarters or even many years (with depression being stronger than lurches). Freight will always be moved but lanes will drastically change as entire industries (such as recreation) will be crushed and new lanes and demands will immerge as de-globalization creates internal demand in other sectors. Hyper-inflation will cause freight rates to be spotted daily or longer term contracts indexed to inflation (can you imagine both fuel surcharge and inflation surcharge?). There could very well be perpetual turmoil in the trucking industry for the next 5-10 years. In other words, that which is at the end of the tunnel may well be blinking like a disco strobe light.
Then again, that’s just my opinion. I like yours! It sounds so much better!
Some people say that a pessimist is simply a realistic optimist.
However, there are signs that the economy is recovering slightly, including those you’ve stated. While the Canadian market in general is sluggish and I believe there is still more pain to come, many companies are saying that they’re not doing as well, but are holding their own.
Will the recovery be robust? Very difficult to say. My view is that there might be a “new normal”, which would be very slow growth rates for the next two years, while consumers pay off heavy debt and the financial system gradually stabilizes.