You’ll need patience -and lots of it -to get through the worst recession of the post-World War era, advise the economic experts speaking at the annual Ontario Trucking Association conference.
The Canadian economy will just take “baby steps” in 2010, according to Meny Grauman, executive director and senior economist with CIBC World Markets, “to the point where you don’t even feel the recovery is happening.”
Although Grauman believes the recession is over and there is little likelihood for a double dip recession, he expects 2010 to be a year of consolidation rather than the solid growth normally experienced after recessions.
John Larkin, managing director transportation with Stiefel, Nicolaus & Co., speaking about the US economy, was even less optimistic: “Maybe when the snow melts we’ll see some greenshoots,” he figures.
Such muted projections certainly put a damper on the hopes of motor carrier executives attending the conference. As OTA chairperson Julie Tanguay remarked only somewhat tongue-in-cheek,
“I can’t believe we paid people to depress us.”
An OTA survey of trucking companies conducted during the first three weeks of the fourth quarter found 41% of respondents had an optimistic outlook for the remainder of the quarter. Only 22% said they were pessimistic. This was a major reversal from the situation which prevailed at the beginning of the year where a mere 17% were optimistic and a majority (52%) were pessimistic. Since that time, the share of the optimists had steadily increased while the share of the pessimists has moved in the opposite trajectory.
And our own nationwide survey of motor carrier executives completed at the end of November found that 40% of motor carriers believed freight volumes would grow in 2010, compared to just 19% who felt likewise at the same time last year. Only 10% felt freight volumes would decrease, compared to 42% who felt likewise at the same point the previous year. Survey respondents rated their degree of optimism for their company’s growth at 5.6 on a scale of 1 to 10, an increase from the 5.1 rating they provided the previous year.
So why were Grauman and Larkin not more upbeat in their projections?
Grauman explained that after a year where for the first time since World War II global GDP growth dipped, the world economy is being rescued from recession by China and the rest of the developing world. But that will set the tenor of the recovery and determine which sectors will improve first, he advised.
Unfortunately for Canada, it’s the US market that matters the most, as more than 70% of exports are absorbed by Uncle Sam. And unfortunately for Canadian trucking, it’s primarily finished products that matter most (as opposed to lower-priced raw materials, which are in demand by China and other developing countries, but which generally move across country on rail).
Grauman’s expectations for the US economy in 2010 were quite succinct: “A pop and a fizzle.”
While he believes recession in the US, as with Canada, is over and third-quarter growth this year is strong thanks to the impact of Washington’s unprecedented economic stimulus, Grauman believes the US will find itself in a “slow crawl” out of the recession overall.
A lot has to do with the hit the US consumer has taken, Grauman said, adding that US incomes are continuing to contract, as is consumer credit.
“Their incomes are dropping, their access to credit is shrinking. They got burned living off credit and they’re not in a mood to shop,” Grauman said. “The US consumer is very resilient. It is always dangerous to declare the US consumer down and out, but sometimes you can get hit too hard.”
It’s important to note the US economy is more reliant on the consumer than Canada’s. About 70% of US GDP is tied to consumer spending, compared to 55-60% for Canada.
Larkin’s comments added to Grauman’s tepid expectations for the US economy. Larkin sees the US economy expanding at “an ever-so-slow pace,” being weighed down by the highest jobless rate in decade -about 10% right now. The jobless rate could be as high as 17.5% in the US if people such as those who have given up looking for work are taken into account (people not actively looking for work are not included in official government unemployment rates).
“That’s a very scary number.” Larkin said.
Looking at other economic indicators, retail spending appears to have “cratered” in the US, but doesn’t seem to be getting worse, according to Larkin. Retail sales have been “bouncing along the bottom” for the last six to eight months.
There has been significant progress made in the inventory to sales ratio (which was way out of whack earlier this year due to a steep drop-off in sales), but is still not where it should be, according to Larkin. That’s an indicator critical to transportation, because as long as inventories remain high, there is no need to generate new shipments.
“How long will it take to reset inventories to the new normal demand levels? The fact is we don’t really know what the new normal is. There is still a lot of uncertainty. It may be a couple more quarters before all the destocking that’s supposed to take place, does take place,” Larkin said.
In the meantime, there is better news for motor carriers who are concentrating on domestic hauls. Grauman expects the Canadian economy to outperform that of the US, although he cautioned it will be “nothing to write home about.”
The Canadian economy will be quicker to rebound because the financial hit to Canadian households has not been as severe as in the US. Household credit is still doing fine, according to Grauman, and the real estate market has come back strong. Also, our jobless rate (about 8.5%) is lower and Canadians are so far able to find new jobs faster once they’re laid off than their US counterparts. Also, much of our federal stimulus will take effect in 2010.
A particular concern, however, is that Ontario, wracked by the demise in US demand for its manufactured goods, is evolving towards a worsening economic situation as a high Canadian dollar makes our goods less attractive south of the 49th.
Larkin specifically addressed the TL and LTL markets in the US. His comments provide valuable insight for the many Canadian motor carriers with significant volumes generated south of the border, and some parallels can also be gleaned for those operating purely in Canada’s domestic market. Let’s examine his comments about the LTL market first.
Trucking rates have dropped so low over the past year that shippers who used to use LTL can now afford to turn to TL services, Larkin said. There continues to be downward pressure on pricing because shippers are convinced there is still too much capacity in the market for the available freight. Small fleets have reduced their capacity by about 15% and large fleets by about 10%, but excess capacity still exists, Larkin agrees.
He believes LTL volumes bottomed out in the second quarter of 2009 but will only see “gradual” recovery through 2010 and into 2011. As a result, the drastic declines in pricing won’t improve until the latter part of 2010.
“But if banks shut down troubled carriers, then it may bounce back faster. A lot of troubled carriers are being given a reprieve from their lenders and that is making pricing miserable,” Larkin said.
He took particular aim at financially troubled YRC Worldwide, which alone accounts for about a fifth of LTL capacity in the US: “The survivability of YRC Worldwide remains the biggest unknown in the LTL industry and potentially the simplest solution to the severe over-capacity problem. This is a company that in our view is not sustainable. They don’t have good service and they have lost a lot of people…If this was happening in the environment of 2002, they would have been bankrupt six months ago.”
Both small and large fleets are downsizing and they should keep going, according to Larkin, because the market will not likely recover everything that has been lost, making downsizing necessary to be in line with new market realities. He says that may happen anyway as some banks refuse to finance new truck orders for troubled companies looking to replace their old equipment.
Pricing continues to be difficult, with shippers expecting 5% to 10% reductions and even looking to reevaluate fuel surcharges and pushing for payables terms to stretch to 60 days from 30.
“Even when they’ve been doing business with a carrier for 30 years, those relationships don’t seem to mean anything any more,” Larkin said.
Overall, the truck tonnage index in the US continues to contract. Dry van, flatbed and bulk tank loads all declined sharply in September, although refrigerated, which has weathered the economic downturn much better than the rest, showed a meaningful increase. The boost from the $28B worth of highway funding announced by Washington as an economic stimulus has also proved a bust so far. Only $4.8 billion had actually been spent by October, according to Larkin, who classified it as a “drop in the bucket.”
Whether north of the border or south of the border, the end result seems the same: the worst is behind us, but by no means will 2010 be a strong year. As Grauman advised: “Good news is still going to take a long time to materialize. Business owners are going to need a recession mentality till 2011.”