DALLAS, Texas - As a main playground for the Canadian business world, the economic conditions in the US have a major impact on many domestic businesses, trucking included. Of all the cross-border comm...
DALLAS, Texas – As a main playground for the Canadian business world, the economic conditions in the US have a major impact on many domestic businesses, trucking included. Of all the cross-border commercial transportation between the neighbouring countries, 64% travels by truck.
The recent rise in interest rates south of the border and a slowing housing market may be causes for concern, but according to industry experts the pinch will be short-lived.
“Basically the fundamental question is we know the economy is slowing,” said Nariman Behravesh, chief economist with Global Insight. “Is it going to be the start of something awful, or is it a hard landing, or is it a soft landing? It’s probably going to be a soft landing.”
Behravesh was part of a panel of experts speaking at the American Trucking Associations (ATA) management conference and exhibition in Dallas on Oct. 30. The panel session, All Eyes on the Economy, was moderated by CNBC Wall Street correspondent and anchor David Faber. Behravesh was joined by fellow economic experts Bob Costello, chief economist with the ATA, and John Felmy, chief economist with the American Petroleum Institute, in the panel discussion.
Some of the main issues facing the US economy, similar to the Canadian market are a slowing in housing starts and a rise in interest rates.
Behravesh points out that while those exposed to the housing market are feeling a pinch, the rest of the economy is not, as capital spending and exports remain strong.
“One of the things we’ve had in the US economy, is we’ve had 17 straight quarters of double-digit earnings,” commented Behravesh. “The construction sector will be saved, even with the slowing housing market. There’s a lot of non-residential construction going on that may save the construction business.”
The rise in inflation rates as well, is not as dire of a situation as it seems.
According to Behravesh inflation is driven by oil prices, which are already on the decline and on average interest rates are still on an even playing field with past benchmarks.
“For interest rates, the feds have been hiking rates for the better part of two and a half years and now it’s going to stop, no more rate hikes,” he noted.
“Even though we’ve come up a lot since 2004, interest rates are still below where they were in 2000. Interest rates are still typically low.”
Domestically, interest rates in Canada have followed a similar pattern.
The rise in interest rates of late may have slowed economic growth, but the rates are still lower than they were five years ago.
The scope of the trucking business has changed dramatically since deregulation and Costello noted that it has resulted in stronger revenue. From 1993 to 1999 revenues and freight volumes were rising at an identical rate. Since 2004, revenue has continued to climb, while freight loads remain the same.
Tighter capacity has helped revenue growth in more recent years and as a whole trucking in the US has enjoyed widespread growth since 2001 until the first quarter of this year.
“What we have to remember is the long run looks good. All modes of transportation are set and trucking is going to continue to dominate freight transportation,” commented Costello. “In the 2017 forecast, we’re expecting to see the economy go up 31%. Where do we account for all that volume? Because clearly we’re going to have a lot of volume coming our way.”
Prices at the pumps have historically played a role in the attitudes of consumers and looking forward, Felmy indicates that reduced gasoline prices will help keep the economy strong.
“Basically an increase in gas prices is like a tax increase and a drop in gasoline prices is like a tax decrease. Gasoline prices have come down, what 8% or something like that, that’s like an $80 billion tax return,” he said.
As gas prices affect consumer spending, healthy paycheques also make for a healthy economy.
“In the end what really, really matters is net worth, consumer net worth and it has been rising for the past 20 years,” explained Felmy.
“Consumers are acting rationally, they’re much wealthier than they were 10 years ago and they’re in good shape. Job growth is pretty good, incomes are picking up, wages are picking up.”
Despite job growth and wage growth overall in the economy, fleets will still have to combat the problem of a driver shortage. Although wages for truckers have been on the rise since the recession in the late-’90s, they’re increasing at the same pace as jobs in construction and manufacturing.
As well as a shortage, large TL carriers in the US also have to deal with turnover rates, which exceed 100%.
The dip in the housing market took a bit of a toll on flatbed trucking, while longhaul business also dropped by about 6.1% during the past year. According to Costello, the dip in longhaul trucking was not an economic factor, but a change in the supply chain and a shorter average haul.
“A lot of large carriers are looking to get out of the longhaul market. It’s harder to get drivers and they’re looking more regional,” he explained. “Large truckloads’ average volume of hauls is down 1%. Conversely small truckload carriers gained on average in the double-digits for hauls. Overall, it’s fairly good.”
Even though the housing market is taking a hit, it hasn’t hurt housing affordability in most areas of the US.
The yardstick for determining affordability is determined by whether or not a household with a median income could own or afford a median home.
Other than the coastlines of the continental US, which both rank below the measure, California and New England specifically, the country is in good shape, according to Behravesh.
“Housing starts and home prices are both falling and we think the bottom is going to be next year, not this year,” he noted. “But even with that, we have a recovery in place and I think we’ll come back in large part because we are in a low interest rate environment and that, I think, will save the day.”
With economies playing on a global scale, crude prices continue to remain relatively high because of tight capacity and demand. During the colder winter months, high crude prices could have an adverse effect on the economy due to higher winter heating bills.
“If you use heating oil you’ll be paying a lot more,” noted Behravesh. “I feel heating impacts are a lot more than gasoline.”
Behravesh pointed out that China will play an interesting role in the global economy as the country’s “official” growth is earmarked at close to 11%.
“Their gain is also our gain, they’re a huge export market and we ought to be able to cash in,” he said. “And our falling dollar makes us much more competitive than the Europeans in the Chinese market.”
“I was just blown away, but you know by 2010 they say 35% of the world’s containers will be filled in China,” added Costello.
The landscape of the economic playground is changing and taking advantage of offshore opportunities, while having the people to handle increased business seem to be the keys to enjoying the economy on its upswing.