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All eyes on the economy: Stuck in the “worst of both worlds” right now

PHOENIX, Az. - You know things can't be good when the experts have to turn to Hannah Montana lyrics to describe the current state of the economy.

PHOENIX, Az. –You know things can’t be good when the experts have to turn to Hannah Montana lyrics to describe the current state of the economy.

Yet that’s exactly what happened during the widely attended All Eyes on the Economy session at the American Trucking Associations’ annual conference, held in Phoenix in mid October. Although association organizers had hoped the city’s name would be symbolic of their industry’s own resurgence from the ashes of two years of slumping freight volumes, downward pressure on rates and rapidly deteriorating profit lines, the best the experts could do was point to continuing difficulties.

Playing on the theme of Montana’s hit song The best of both worlds, David Huether, chief economist, National Association of Manufacturers, said the North American economy remains stuck in the “worst of both worlds right now” with the most severe recession of the post-war era followed by an irritatingly slow recovery.

Bob Costello, chief economist with the ATA, put some sobering numbers behind Huether’s statement. Historically, strong recessions have been followed by even stronger recoveries. For example, GDP was set back by 3.2% during the 1975 recession in the US but was followed by 6.5% GDP growth during the recovery. The 1982 recession took a 2.6% slice out of the nation’s GDP but the recovery posted a 7.7% gain. That pattern is not being followed this time, however. Although GDP declined by 4.1%, so far GDP growth has been a comparatively meager 2.6%.

Admittedly looking to remain positive, Costello said “I’m going to say the glass is half full… The probability is we are out of the woods but it will be sluggish growth ahead. I don’t see growth above 3% till the last quarter of next year.” He added that the chance of falling into a dreaded double-dip recession is about 25% right now. (Other economists, including Export Development Canada’s Peter Hall have placed the likelihood higher, between 40% and 50%).

The North American economy did seem ready for a strong rebound during the final quarter of last year and the first quarter of this year, fuelled in large part by the large influx of stimulus spending conducted by both the US and Canada (and much of the industrialized world). So why has the rebound fizzled?

Consumers are a huge part of the US economy, comprising about two-thirds of GDP spending. But US consumer confidence has been on the decline since March. Consumer purchases of services such as dining, insurance and travel, account for 48% of the US economy. Yet their purchases of such services right now is considerably below previous recoveries.

“Right now consumer confidence is a scary roller-coaster. The consumer is still operating as if we are still in recession,” said Scott Krugman, vice-president of industry relations with the National Retail Federation, adding that dropping confidence is continuing into the start of the holiday season, which accounts for 30-40% of US retail sales. Retailers are already being forced into heavy markdowns to attract buyers.

Krugman forecasted a 2.3% gain in holiday sales for 2010. To place the gain in perspective, over the past decade a 5% gain in holiday sales was considered healthy. Discount stores stand to do well in this lingering malaise and, paradoxically, retailers tailoring to the luxury market, which is rebounding well.

“That leaves the department stores stuck in between. If everybody is discounting, how do you stand out?” Krugman asked.

Huether also pointed out that the US housing market, another major contributor to robust economic growth during past recoveries, is also off. House buying has risen only 5% this year.

A huge contributing factor has been the continuing high unemployment levels in the US, which with the state governments now laying off thousands of workers, will likely climb above 10%, according to the ATA economic panel experts. Costello pointed out that so many jobs have been lost during the recession that it will likely take till the end of 2013 for the US economy to gain them all back.

“When unemployment is high, the probability of people buying new homes is quite low,” Huether cautioned.

Manufacturing in the US has been particularly battered during the recession with production falling 17.5% and two million jobs shed. The sector, an important client for trucking companies, has begun its comeback with 8.5% growth so far and the recalling of workers. But most of those recalls were during the first four months of the year and job growth in manufacturing has been stagnant since.

“A pace of 2-3% growth is not enough for job creation,” Costello said. It doesn’t amount to much good news for trucking companies, many of which were hanging on by their fingernails hoping for a strong uptick in the economy to bring freight volumes back to life and bring a reprieve from the downward pressure on rates. Total tonnage fell by 16.5% over the recession. In the truckload sector, loads fell 24% peak to trough.

“No industry can handle that kind of decline,” Costello said.

Are there any bright spots? Remember, Costello did say he was taking a “glass half full” approach to his economic outlook. Costello pointed out that while credit conditions are not good, they are improving. And for those companies with balance sheets strong enough to warrant easy credit, rates are at historic lows. Huether believes US business is sitting on $1.6 trillion in cash reserves and is not spending due to the uncertainty in the marketplace. But that also means when the uncertainty is over there will be plenty of money to invest in a resurging economy.

Looking specifically at trucking, Costello likes what he sees happening on the capacity front and believes it will drive future prosperity for the industry.

“We have never seen so much supply come out of this industry. It wasn’t easy to do but it is now starting to pay dividends. And there is nothing to suggest that there will be a strong capacity influx. Government regulations (such as CSA) will also be taking capacity out of the system. I think this industry can do very well in this situation,” he said. “When we meet in Dallas next year, we will be on the cusp of some of the best years in trucking.”

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