Fear may drive markets but solid fundamentals drive economic recovery

Last month we held our second annual Profitability Workshop for carriers in partnership with Dan Goodwill and Associates and with the support of Peoplenet Canada. Profitability, of course, has been an all too elusive concept the last couple of years and many motor carrier executives remain anxious about what appears to be a fragile recovery, particularly in light of fears that the recent economic turmoil in Europe could plunge us back into recession. I know I personally held some reservations about the strength of the recovery and the health of our industry, the jist of a rather frightening economic discussion at a recent truck show still haunting me.
We thought it critical to address the status of the Canadian recovery at our workshop and invited Carlos Gomes, senior economist with Scotiabank, to share his insights. I’m glad we did because Gomes had a very positive outlook on the economy to counter all the fears. The recovery is gaining momentum and the fundamentals are looking very strong, according to Gomes’ economic analysis. In fact, GDP growth could hit 4% year-over-year; in other words we are lurching towards normal.
Certainly the transportation statistics bear out his optimism. US truck tonnage rose 0.9% in April, marking the sixth increase in the last seven months, the American Trucking Associations reported recently. The ATA’s Truck Tonnage Index now sits at its highest point since September, 2008. Overall, US truck tonnage is up 6.5% over the past 7 months. April’s tonnage was up 9.4% compared to last April, the fifth straight month of year-over-year gains and the largest year-over-year increase since January 2005. Tonnage is up 6% year to date compared to the same period of 2009.
Share prices for Canada’s handful of publically traded trucking companies is also showing improvement with Transforce leading the way. That’s an indication the market believes the North American economy is improving, according to Elian Terner, director of investment banking at Scotia Capital and also a speaker at our Profitability Workshop.
Truck tonnage volumes are being boosted by robust manufacturing output and stronger retail sales.
For the hard-to-convince, Gomes pointed to several more indicators that the recovery has taken hold: Global trade is bouncing back, with growth in the 14-15% range expected this year. The housing market in the US still has unresolved issues but housing affordability is at one of the best levels on record. The financial system may be tighter than it used to be during previous economic recoveries but it is now healthy and not so tight that it would impede business growth, according to Gomes. And much of the government stimulus, on both sides of the border, will be spent this year.
With so many positive signals, why all the worry about a double-dip recession?
The massive debt western governments are incurring is one reason. Canada’s estimated $50B debt is larger than the mess Paul Martin had to clean up back in the early 90s. But Gomes pointed out it’s important to place the size of the debt in perspective. The Canadian economy has grown a fair bit since the early 90s, enough so that the current debt makes up 3% of Canada’s GDP, which is a smaller percentage than back in the early 90s. In fact, Canada is one of the most financially healthy nations in the western world as we head into recovery.
What explains the volatility we’ve seen in the markets of late? According to Gomes what we are seeing is simply fear-driven concern. Markets hate uncertainty and that’s why we’ve seen some dramatic drops just as things started to improve. But going forward it will be the fundamentals that will drive the economy and, as mentioned, they are solid.
I know skepticism about the health of our economy continues but I must concede it’s hard to argue against a case built on the fundamentals. Perhaps it’s time we all got over the shock of the recession, stopped worrying and got on with the work of rebuilding. For, as Terner pointed out, the carriers that have a clear strategic focus will benefit the most during the economic recovery.

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With more than 25 years of experience reporting on transportation issues, Lou is one of the more recognizable personalities in the industry. An award-winning writer well known for his insightful writing and meticulous market analysis, he is a leading authority on industry trends and statistics.

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  • Dear Lou:
    A well written, but gloomy outlook.
    Let me make an observation that should stir up debate. Unless the traditional transport carriers start adding some of the “value” offered by their cousins in the logistics industry, the turnaround is going to be painful for many companies. The logistics industry is taking a good deal of the cream that the transportation companies should be receiving.
    Mark Borkowski
    Mercantile Mergers & Acquisitions Corporation