‘Muted expectations,’ advised for ongoing economic recovery

by James Menzies

Motor carrier executives “Should not have high expectations for the remainder of this recovery.” That was the somber advice from Noel Perry, managing director and senior consultant with industry forecaster FTR, when addressing clients during a recent State of Freight webinar. While US GDP growth has been moderate through the first three quarters of 2013, Perry noted it’s expected the government shutdown in October could reduce Q4 GDP by half a point.

At the same time, the industrial sector and home sales have leveled off.

Worse yet, Perry noted, “We are now at the point where historically, you would begin to expect a recession at some point in the next two to three years…History says recessions tend to occur in five- to seven-year increments and seven years from 2009 is 2016, so you should have in your scenario portfolio a recession in the next couple of years, regardless of whether we or anyone else forecasts it.”

The economic outlook in the US seems destined to remain on shaky ground. Perry said its total debt is now greater than 100% of its GDP, putting it on par with nations such as Portugal and Ireland and worse than France and Italy. This is “no big deal” in the short-term, said Perry, but it could “reduce our flexibility for the future.”

Since the credit markets continue to be willing to lend the US money, there’s no sense of urgency to resolve the debt situation, Perry explained. This means there could be further wrangling among politicians in Washington over whether to cut spending.

“The only real risk from this situation is that at some point, we could have a long-term shutdown of government,” Perry noted.

As for the freight outlook, that too could be softening. Industrial production thus far through the recovery has outpaced GDP growth, but that has come to an end as the recovery transitions into a “service-driven” recovery.

“Freight growth is likely to be less than it has been so far in this recovery,” Perry said, noting it so far has been quite strong, with freight demand growing at about 5%. “The industrial production bar is not as exciting as it was earlier in this recovery.”

Even Perry’s seemingly bleak forecast could get worse. He noted forecasts are built upon a “relatively calm world” and conditions could change in a hurry if consumers or investors overreact to negative quarterly indicators.

“This recovery has been unvolatile,” Perry said. “Even though we’ve had disappointing growth, we’ve had stable conditions that makes it easy to invest and easy to manage a truck fleet because you’re not trying to chase the market up or down. One of the critical variables over the next couple of years is, will this stability continue? History says it won’t and therefore, my strong recommendation is that you keep your operations and your investment horizon flexible, because things can change rapidly.”

Perry did have good news to deliver on the fuel front, projecting diesel prices to remain flat through 2014 and “maybe as far out as 2016.”

An onslaught of new regulations continues to provide headwinds for carrier productivity. The new hours-of-service rules introduced last summer necessitated the hiring of 50,000 drivers in the US, Perry said, and for many carriers struggling with 100% turnover, that really means hiring two drivers for every one position that needs filled. But the real impact of the new HoS rules may not yet have been felt, Perry warned.

“The hiring mechanism is not that flexible, so people get behind and it takes three to four quarters to catch up,” he explained.

Trucking is now enjoying strong capacity utilization, Perry noted, but to achieve that, it has shaken out its “excess surge capacity,” meaning a sudden spike in demand for trucking services would likely result in a strong pricing increase. And that just may be the best outcome carriers can hope for in the short-term.

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