Are you recession-ready?

by James Menzies

Take a deep breath, plug your nose and get ready to go under. The Canadian economy seems poised to enter recession, even though the ‘R’ word is not being uttered in Ottawa, with a federal election now scheduled for Oct. 19.

A recession is widely defined as two consecutive quarters of negative GDP growth. Canada is edging dangerously close to this territory, with negative growth in each of the first five months of 2015. Canada’s real GDP fell 0.2% in May, the latest figures available at press time. While some economists aren’t yet ready to declare the economy in recession, others say it would take a June GDP miracle to avoid slipping into recession.

The Bank of Canada in July attempted to resuscitate the Canadian economy by way of an interest rate reduction. That move alone was seen by many as an admission the economy is in trouble, if not officially in recession. 

Canada’s GDP growth has been negative every month so far in 2015.

However, while a recession would be bad news for the Canadian trucking industry, there’s still hope among some leading economists that it can be skirted. Carlos Gomes, senior economist with Scotiabank, told Truck News economic fundamentals are still strong.

Asked if Canada is in recession, Gomes instead referred to the current economic situation as a “two-speed economy.”

“If you look at domestic activity, it remains very resilient. Consumer spending is doing well. Auto sales are at record highs. Housing activity is buoyant. Employment conditions have actually accelerated over the past year to about an average of 16,000 jobs created each month,” Gomes explained. “That’s a significant improvement from an average of about 10,000 during the previous two years. One part of the economy is doing well, however there is significant weakness on both the business investment side and the export side. That’s really the concern.”

Gomes suggested some one-time events – extreme cold weather last winter and forest fires and drought conditions this summer – have dampened economic growth.

“We are basically in the midst of somewhat of a slower pace of growth, but we do still have some positives out there,” he said. “I wouldn’t say we’re in the midst of a broad, generalized slowdown. The reality is that the pace of growth is more moderate than what we were expecting, because of these one-time events. We think that it will pick up some momentum in the second half of the year.”

While Gomes said Canada’s economic growth has been “somewhat disappointing,” he also said we may be able to ride the coattails of a strengthening US economy.

“The financial shape of US households is probably the best it’s been in several decades,” Gomes, who will be giving an economic overview at the Surface Transportation Summit Oct. 14, pointed out. “While growth may be a little bit weaker than we were expecting the fundamental backdrop remains very, very positive. In fact, if you look at interest rates, not only here, but globally, they are very, very low. Central banks around the world continue to have very loose and stimulative policies. That leads to very supportive financial conditions, which is really the key driver of economic growth. It’s only really when you get financial conditions becoming significantly tightened that you have cause for concern.”

Gomes, whose outlook on the economy tends to be relatively optimistic – and accurate – may not be concerned, but how are truckers doing on the front lines? It depends who you ask, of course, and when Truck News went asking, we heard the full range of responses. They varied widely depending on geographic region, commodities hauled and size of the organization. We heard that for the first time this year since the Great Recession, there has been a noticeable summer slowdown. We heard freight has all but disappeared in certain segments. And we heard business is great, which is a rarely heard admission in this business – even when it’s true.

Bill Cameron, owner of small Ontario-based flatdeck carrier Parks Transportation, said freight is still available, but has become less predictable than it once was.

“I’ve noticed that customers are waiting until the last minute to pull the trigger on taking a load,” Cameron said. “They don’t want it invoiced to them until they know it’s going to turn right around and leave again. This is with both flatbed and the food product we move in dry vans. Also, we’re taking more building material loads that are only three quarters full. Pre-recession in 2008, they might take what they needed for a particular job and then fill up the truck with whatever additional inventory they normally sold. Now, they don’t want to inventory anything. There seems to be no predictability of who, among our regular customers, will want their loads or when.”

However, just after providing that response, Parks Transportation received a significant order for freight.

“This is the ‘wave pattern’ we’ve been riding since 2009,” Cameron said.

The picture is grimmer for owner/operators, especially in hard-hit Alberta, where stubbornly low oil prices and the arrival of a new government have changed the face of the province.

“We would not be buying a truck in today’s environment,” said Greg Decker, owner of Triple Decker Transport, with a truck leased to Mullen Group. “We are suffering from an extreme downturn in freight volumes, with rates down up to 25% and no fuel surcharge on many orders. We are hauling machines on six axles that used to be exclusive to seven axles. Our permit costs are up accordingly, due to weight. It’s no fun right now to own a truck. We missed the minimum money to pay the bills last month by 30%. This month has the possibility of hitting the minimum – if there is a load waiting for me in Texas on Monday. If not, we will miss by 30% again this month.”

Fortunately for Decker, the load was there, though it was headed to the yard to sit for three weeks before its final delivery.

The scene has been equally challenging for Canada’s publicly traded carriers. TransForce, the largest of them all, reduced its guidance in late July after a softer-than-expected first half, thanks to major volume declines in Alberta and the lack of a manufacturing resurgence in Ontario that was hoped for in light of a weakening loonie.

“The economy in Canada has contracted since the beginning of this year and the reduced business activity in the oilpatch has had more far-reaching impacts than originally anticipated,” chairman, president and CEO Alain Bedard said during an earnings call with analysts. “When we were making our plan in September-October of 2014, we never anticipated the backlash of this oil situation that affected so much in Alberta, Saskatchewan and also had some ripple effect in Ontario. With the 75-78 cent Canadian dollar, we thought that if this happens, the Ontario – and to a certain degree, maybe Quebec – manufacturing base should get a boost. We had major issues in Alberta and Saskatchewan and we didn’t get that benefit in Ontario.”

Bedard said the situation in Alberta is “really bad and I think it’s going to get worse.”

He still hopes for a manufacturing resurgence in Ontario but said he’s not counting on it.“In theory, with the Canadian dollar being at 75 cents, we should start to see things start moving in Ontario, but we haven’t seen it,” he said.

“My guys think it’s going to happen but we haven’t seen it. The Canadian economy is not moving at all.”

At Mullen Group, a company primarily focused on the oilfield services segment, things were much worse, with net profit plummeting 96.5% in the second quarter. For Mullen, its trucking and logistics segment was its saviour in the first half of 2015. This is the segment in which the company will be looking to invest its capital and to grow, according to Murray Mullen, chairman and CEO of Mullen Group.

“We are always looking at acquisitions to augment our growth, but we do not do acquisitions for growth, we do them because they are strategic, and because they meet our financial thresholds. Trucking and logistics is our favourite area of focus at this time,” Mullen said.

Economic uncertainty, however, seems to have dampened mergers and acquisitions activity through the first half of 2015. It’s possible the major buyers, TransForce and Mullen, are still digesting their large acquisitions from last year (Contrans and Gardewine Group, respectively), but in a low interest rate environment, industry observers are surprised there hasn’t been more movement.

“Frankly, I was expecting a lot more (M&A activity),” Roger Poirier, managing director, invesment banking with Cormark Securities, told Truck News, noting the lack of activity could be due in part to segments that are underperforming. “I would say that people were expecting EBITDA, for the most part, to be better than it is.”

One of the biggest variables affecting trucking companies and owner/operators is the value of the Canadian dollar. It was at about 76 cents versus the US greenback in early August, its lowest level since 2004. This is a two-sided coin for trucking companies; some can bill US-based customers in US dollars, benefiting their bottom line. But all must pay more for equipment, which can prohibit growth – especially for those who can’t bill out receivables in US currency.

Gomes told Truck News Scotiabank just downgraded its outlook for the Canadian dollar, which could mean further increases to new equipment prices.

“We think it’s likely to ease off below 75 cents in the coming months,” Gomes said of the value of the loonie, relative to the US dollar. The potential benefit of a cheap loonie is that manufacturing in Canada becomes more attractive.

“That should provide some support to manufacturing activity,” Gomes said of the sinking loonie. “That being said, things such as the machinery sector will still continue to be impacted by slowing demand from the oil and gas sector. We estimate that demand from the oil and gas sector to oil and gas machinery is down, probably something in the order of about 30%.”

Still, he remains optimistic a strong US economy can mitigate the effects of a weaker one in Canada – at least for a time.

“I think the key point here is that we’ve started to see the US numbers get better,” Gomes stressed. “The first quarter GDP in the US came in at 0.6%. The second quarter, came in at 2.3%, a clear step up from where it had been. We’re expecting growth in excess of 2.5% for the remainder of 2015 and maybe a small and further improvement in 2016. I think that would go a long way in providing additional support for the Canadian manufacturing sector.”

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