What is the impact of the financial crisis on the trucking industry?
October 12, 2008
October 12, 2008
The current economic crisis has been described by esteemed investor Warren Buffet as an economic “Pearl Harbour.” The cost of the bailout ($700 billion), the earmark spending ($100 billion) included in the bailout bill along with the nationalizing of Fannie Mae and Freddie Mac and the insurer A.I.G. and the financial support provided to the forced mergers of some giant U.S. financial companies has run up a tab estimated at $1.8 trillion. This sum of money is larger than the combined economies of Canada and Spain. This is clearly the worst financial crisis since the Great Depression.
In this blog, I will examine the potential impacts of the financial crisis on the U.S. economy as a whole and on the trucking industry. The effects of the U.S. economic downturn are becoming quite apparent.
• Increasing Job Losses – September was the worst month for job losses in a number of years and there are projections that U.S. unemployment could grow from 6.1 to 10 percent.
• Increasing home foreclosures – Significant numbers of Americans, particularly those who acquired so-called sub-prime mortgages are finding that their debts exceed their equity in their homes and are walking away from them.
• Tightening Credit – Stung by load defaults, lenders are raising interest rates, down payment requirements and credit worthiness requirements to minimize bad debt exposure.
• Declining Home Sales and Home Building – As home prices fall and with economic uncertainty, home sales are declining and house prices are declining.
• Declining Consumer Confidence – As stock markets decline, job losses increase and home values decrease, consumers feel less wealthy and less confident.
Tighter credit makes it more difficult to buy a car. Falling home prices will make it more difficult to borrow money against the equity on your home. Less confident consumers will be less likely to renovate their homes and buy luxury items such as flat screen TV’s and numerous other goods. The impacts of the expected U.S. slowdown will be felt around the world. As the wealthiest nation on earth, declining U.S. consumption will hurt the economies of many other nations.
How bad will things get? The current issue of Business Week contains some interesting data. During the Great Depression of 1929-1934, 10,000 commercial banks disappeared. Since August 2007, 14 banks and 3 major investment houses went out of business. Take home pay income shrank 25% by 1933. In the U.S. the decline is 5% since May. The output of U.S factories and mines declined by 54% between 1929 and 1932. Industrial production has shrunk by only 2% since January 2008. Of course, the Great Depression data was complied over a longer time horizon. On the other hand, it is unlikely that U.S. will experience economic declines of the magnitude of the Great Depression in the coming years.
There is no way to tell how well this bail-out package will work. There is no doubt that we are heading into a difficult period and it will take time to work our way out of what many experts believe is a certain recession. The new U.S. President along with the House and Senate will have a major challenge on their hands. Many aspects of the U.S. financial situation and U.S. culture will require an overhaul. There will need to be more regulation of financial institutions, better oversight of financial activities, an improvement in executive pay for performance metrics and procedures, tighter lending requirements and a mindset change on the part of many consumers that you can enjoy the “American Dream,” a home and cars in the suburbs, if you can afford to pay for them or have the income stream that will allow you to obtain credit. That is a tall order and it will take time.
What are implications for the trucking industry? These have already been two of the most difficult years that many long time observers, including me, have seen. A positive effect of the trucking company bankruptcies and parked trucks has been that supply and demand appeared to coming into balance. ATA shipping volumes appeared to be firming up.
This will almost certainly change. Tighter credit, higher unemployment and lower consumer confidence will certainly shrink demand. Tighter credit will restrict capital investment in new truck fleets. One can also expect to see slower payment from shippers. For those companies hanging on “by their fingernails” and hoping for an economic turnaround, recent events will almost certainly mean another twelve months of difficult times.
Some companies are already reading the economic “tea leaves” and taking drastic action. The decision by YRC to merge the operations of Roadway and Yellow after insisting for years on the importance of maintaining their individual brand identities is clearly an acknowledgement of the tough times ahead. I would expect to see more bankruptcies and a speed-up in merger activity. In some sectors of the freight market there are simply too many companies chasing too little freight. With declining demand, this will continue to place shippers in the driver’s seat on rate negotiations. This should enocourage carriers to remain lean and focus on improving their value propositions. Some further carrier rationalization would seem inevitable and probably desirable to keep freight rates at profitable levels.
Looking ahead, America is still a strong country with an excellent workforce and a great entrepreneurial spirit. The country will soon be under new political leadership. While the enormous bail-out package will impose limitations on spending, new leadership should create a more positive environment than has existed over the past number of years. As noted above, this financial crisis pales in comparison to the Great Depression. The speed with which the bailout package was designed and passed into legislation already reflects the determination and resilience of the American people. If the bailout money is used wisely and consumers and businesses are given the right tax breaks and incentives, this should help quickly move America back on the road to recovery.
Dan Goodwill, President, Dan Goodwill & Associates Inc. has over 30 years of experience in the logistics and transportation industries in both Canada and the United States. Dan has held executive level positions in the industry including President of Yellow Transportation’s Canada division, President of Clarke Logistics (Canada’s largest Intermodal Marketing Company), General Manager of the Railfast division of TNT and Vice President, Sales & Marketing, TNT Overland Express.
Goodwill is currently a consultant to manufacturers and distributors, helping them improve their transportation processes and save millions of dollars in freight spend. Mr. Goodwill also provides consulting services to transportation and logistics organizations to help them improve their profitability. All posts by Dan Goodwill