NEW ORLEANS, La. - US trucking executives attending the American Trucking Associations' (ATA) popular All Eyes on the Economy session here recently received sober news but did leave with at least some...
NEW ORLEANS, La. –US trucking executives attending the American Trucking Associations’ (ATA) popular All Eyes on the Economy session here recently received sober news but did leave with at least some glimmers of hope.
While all three experts on the panel -Bob Costello, chief economist and vice-president of the ATA, Mark Vitner, managing director and senior economist with Wachovia Corp, and Dr. Peter Ruane, president and CEO of the American Road & Transportation Builders Association -all share dire views of the economic picture, they did point to new opportunities to finally get politicians to address the long-standing issue of infrastructure neglect while also being positive about the future of energy pricing and rates.
Vitner confirmed executives’ worst fears from the start when he told them “I clearly think we are already in a recession.” Vitner said that while the export busi- ness still has some residual strength, the domestic economy was in a downturn even before the much publicized events on Wall Street of the past month.
Adding insult to injury, the Dow Jones on the morning of his speech had plummeted 700 points and lost 1,500 points, or 14.5%, over the past five and half trading days, despite the government’s approval of a massive Wall Street bailout.
He said that unlike the two most recent recessions, which were quite mild, this recession will be more like the recession of 1973-75 (which was also centred on real estate problems and lasted 16 months before recovery set in rather than the usual nine months) and that of 1981 (which saw unemployment rise to its highest level since the Depression, lasted a long time and took the economy several years to return to its pre-recessionary strength).
“We’re not going to lose a decade but we are going to lose half a decade,” was his dour prediction, adding he expected the US unemployment rate to rise to 8% and GDP to grow just 0.3% next year, with the next nine months being “very soft.”
He explained that all the credit problems in the economy have yet to surface and predicted that credit for business will not open up until sometime in 2009.
“The bailout bill needed to be done two weeks ago to have done any good. Now it is just preventing things from just getting much worse,” Vitner said.
Costello acknowledged his hopes earlier this year that the economy would rebound have been dashed.
His hopes for recovery were based on the fact that data was not showing a dramatic fall in truck tonnage similar to what happened before the last recession.
But he conceded that economic activity, instead of being dashed by one momentous event, has faced a “death of 1,000 cuts.”
Those would include issues such as the lack of business confidence after the failure of so many Wall Street institutions, the expectation of much tighter credit conditions for business, the collapse of American consumer confidence, political uncertainty, the anticipated resurgence of regulation and the downwardly spiraling economy, all at a time of high energy costs.
But even before the current crisis there have been trends that have been hurting trucking, such as the drop in total freight tonnage consumed per person as packages get smaller (a direct result of a consumer economy increasingly being driven by electronic gadgetry -cell phones, cameras, computers, iPods, etc.) that are being designed smaller and smaller and shipper efforts to reduce packaging to cut transportation costs in response to high fuel surcharges and the need to reduce their carbon footprint.
“You have to prepare for this cycle to get worse before it can get better,” Costello counseled, soberly adding that “until we can really assess what’s going on we can’t assess truck tonnage. It’s going to remain volatile.”
But the pain won’t be felt to the same degree across the entire trucking industry, Costello said. The tank trucking business is not doing too bad, nor is the reefer business.
The flatbed business is particularly hard hit because of the collapse of the housing market and the dry van sector will get worse, he said.
And small carriers, unless they are in a niche business with good clients, will suffer.
Vitner further pointed out that 56 cents of every consumer dollar is now going to essentials such as housing, energy and food which leaves retailers like Home Depot fighting with clothing stores for the remaining change.
When moderator Stuart Varney from Fox News informed the panelists the Democrats were considering earlier that morning a second bailout package that would include investments in infrastructure as an economic stimulant, both Costello and Dr. Ruane pounced on the opportunity to vent long-held frustrations.
Investments in infrastructure were at the core of the growth in the US economy from 1950 to 1970 and can be again, Dr. Ruane said. In fact, it’s appalling just how much the infrastructure has been neglected in recent decades.
One quarter of the bridges in the US are either obsolete or structurally deficient while more than 17% of the paving is considered to be of poor to mediocre quality.
Nearly $500 billion would need to be invested just to address the backlog of needed repairs, Dr. Ruane said.
When Varney asked if such spending is realistic considering the US has just committed to shelling out more than $700 billion on the bailout and faces a trillio dollar deficit, Dr. Ruane countered that the current economic crisis should be seen “as an incentive to do something, not just sit there and do nothing,” emphasizing the stimulative effect infrastructure spending can have on the economy.
He also stressed that the US is falling behind its international competitors when it comes to infrastructure investments. For example, he said, while China will add 53,000 miles of road by 2020 and India 25,000, the US will only add 1,130.
And while the emerging markets spend about 6% of their GDP on infrastructure, the US spends just 2%.
“These emerging markets are going to surpass us. It’s a horror story,” Dr. Ruane said.
Costello chimed in that infrastructure deficiencies may lead manufacturers to resort to the costly practice of holding larger amounts of inventory once again because they can’t count on timely deliveries.
But Dr. Ruane said privatization is not the magic bullet for infrastructure projects but rather only part of the solution.
He characterized privatization of infrastructure as a “weapon of mass distraction” for politicians who are unwilling to put in the work necessary to find the funds – through raising taxes, charging user fees, etc. – and just decide to hand entire projects over to the private sector.
“We need all the solutions at the table,”Dr. Ruane said.
Vitner disagreed, arguing that the US trails the rest of the world in privatizing infrastructure projects. “I think privatization has been sold short,” he said.
The panelists identified two more glimmers of hope for trucking executives: dropping energy costs (oil had just fallen below $90 a barrel) and shrinking capacity, which will eventually lead to an upward push on rates.
Vitner said China’s traditional double-digit GDP growth will drop to about 3% while India will drop from 8% to 2% and Russia will have negative growth.
“Consumption of oil is falling like a stone. That’s why oil prices are dropping. If (the price of crude) drops to $70, I don’t know how far it will fall,” he said, adding that he had previously predicted oil prices falling to $70 per barrel but that was before the recent calamitous economic events.
Costello meanwhile said that capacity in the trucking market will become very tight once the economy returns to health.
He said the number of trucks in the TL sector in the US shrank by 2.7% in 2007 and by 1.3% in the first six months of 2008.
And these trucks are not just being parked; they are being sold ov
erseas, mainly to Nigeria and Russia. (The latter purchased almost 6,000 trucks from the US in the first half of this year).
“This capacity is not being idled, it’s gone,” he emphasized.
‘You have to prepare for this cycle to get worse before it can get better.’