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Continued economic strength ahead, senior Scotiabank economist predicts

Now’s the time to fix what’s broken in your business, Kriska’s Seymour advises


MISSISSAUGA, Ont. — Leading economic indicators are pointing towards continued economic growth and favourable conditions for motor carriers.

That was the upbeat message from Carlos Gomes, senior economist with Scotiabank, when providing an economic outlook at the sold-out Surface Transportation Summit here today.

“Despite all the events of the last week in the equity markets, we continue to be optimistic with respect to our outlook,” Gomes told nearly 400 motor carrier and shipper executives.

Gomes said global economic growth is expected to accelerate over the next year.

New order activity, which tends to lead industrial activity, has been on the rise globally.

“When we look at the global economy, most regions are on an upward trend, especially the US,” Gomes said.

The European economy has returned to growth mode, albeit at a modest pace. China’s economic growth is expected remain around 7% per year.

While household debt in the US and Canada is high, Gomes said he isn’t alarmed because interest rates are low and household finances are actually healthier than in the past.

“In both the US and Canada, the key thing that’s important is that household balance sheets have improved significantly,” Gomes said.

In 2007, about 20% of disposable income went to paying debt, interest and energy costs. Today it’s about 15%.

“While debt is high, the fact rates are low and energy prices are actually declining as we speak, means it’s not consuming a significant amount of household income,” Gomes said. “It leaves significant disposable income for other purchases.”

This is good news for the auto sector, which has seen demand for new vehicles return to pre-recession levels while the average age of the fleet remains at a record high.

“The financial conditions of households are very healthy and the average age of the fleet in the US is about 11.5 years. About 40% of all vehicles in the US are more than 12 years old. That tells you if they’re not going to be replaced this year or next year, they’ll definitely have to be replaced one to three years down the road, so that gives me confidence we’re going to have a decent cycle for an extended period of time,” Gomes said.

Gomes sees Canadian exports growing 6% in 2015 and is bullish on the US economy, where consumers are financially stable and manufacturing activity is up.

Asked if he has any concerns, Gomes said economic conditions in Europe and China still bear watching, as do interest rates in the US and Canada, though indications are that they’ll be kept low for the immediate future.

David Newman, equity research analyst, Cormark Securities, agreed with Gomes that economic indicators are strong and so too are conditions facing trucking providers. Newman noted about 20% of US trucking capacity was removed due to the recession, a tougher regulatory environment and the driver shortage. Trucking rates are going up, Newman said, and active truck utilization has reached 99%, giving carriers some pricing power.

Newman pointed out the US economy should remain strong, even if there is turmoil in Europe and China, since 80% of US corporate profits are domestic.

The Canadian Purchasing Managers’ Index recently hit a nine-month high, which is another indicator of freight volume strength.

Cormark’s own North American Freight Monitor points “toward a healthy freight volume environment” as well as pricing increases, Newman said.
Canadian ports are “booming,” he added, thanks to the diversion of containers from the ports of L.A. and Long Beach, which experienced labour issues over the summer.

The Canadian spot market has seen volumes rise 42% year-over-year and rates have been increasing, which is now cascading over into contract rates, Newman said.

Providing a fleet perspective, Mark Seymour, president of Kriska Holdings, said carriers need to take advantage of current conditions and a healthy rate environment to fix what’s broken within their organizations.

“We’ve had a good run the last three to four years,” Seymour admitted. “It has been a good run but there’s lots of work to do around our drivers and wages and the way we treat them. Those are the areas we are working on the most right now.”

Seymour also advised carriers to take advantage of the opportunity to re-assess how they run their businesses now that freight volumes and rates are strong. And this will require working with shippers.

“There are lots of opportunities right now to work on the issues within our business as it relates to profitability and discipline,” Seymour explained. “We can take this opportunity to fix things that are broken. There has never been a better time to do that; to tighten our network, charge for things we haven’t been able to charge for in the past, to adjust short-term pricing strategies and not lock down into a three-year pricing model because our costs are going up too quickly. We are never able to engineer solutions and get waste out of the system if we’re forever going back (to customers) year after year, wondering if we’re going to be able to keep the business in certain lanes and certain markets.”


James Menzies

James Menzies

James Menzies is editor of Truck News magazine. He has been covering the Canadian trucking industry for more than 15 years and holds a CDL. Reach him at james@newcom.ca or follow him on Twitter at @JamesMenzies.
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