HALIFAX, N.S. — Ray Mawhinney, chair of RBC Asset Management, delivered a refreshingly optimistic overview of the US economy and its trucking industry during the Atlantic Provinces Trucking Association’s first ever International Transportation Summit here this week.
Although he began with a disclaimer that he’s not an economist, Mawhinney’s role is to analyze US economic conditions and specifically the health of the US trucking industry for investors. While he acknowledged the US economy is on its way into recession this quarter, he said “it’s not insurmountable.”
He pointed out the current economic meltdown pales in comparison to past events because the losses represent a smaller percentage of overall GDP than during events such as the Great Depression or even the Japanese banking crisis in the 1990s.
“We’re going to have a difficult spell first, then we’re going to come out of it in 2009,” predicted Mawhinney.
While the US still has not technically slipped into recession, Mawhinney noted the economic stimulus package passed in May, 2008 artificially buoyed GDP growth in the second quarter and kept it from recording two consecutive quarters of negative GDP growth.
“(US consumers) had money in their pockets, and it buoyed the economy artificially for at least one quarter,” he explained.
Much of the economic problems plaguing the US stem from the sub-prime mortgage crisis. Mawhinney said that only 10% of US mortgages were held by sub-prime borrowers in early 2005. That number ballooned to 40% by the end of 2005 and in 2006, nearly half of all US mortgages were sub-prime.
Today, said Mawhinney, 20% of all sub-prime mortgages in the US are in default.
“It ends up being toxic throughout the system,” he said.
Another side effect is that the housing market has collapsed. Year-to-year, Mawhinney said the US housing market is down 15% and it could fall by another 10%. However, there are signs the worst may be over, he said.
“The good news is, on a month-over-month basis, the rate of change is slowing,” he explained. Instead of dropping by as much as 3% each month, US house prices are now falling by only about 1%. Mawhinney predicted the housing market could begin to recover by the latter part of 2009.
Mawhinney said his group is predicting GDP losses in the US of: 1% in Q3; 4% in Q4; and 2% in the first quarter of 2009. He said that should be followed by positive growth of 1% in the second, third and fourth quarters of 2009.
“Our feeling is that it’s not going to be a major rebound, it’s going to be a modest recovery,” Mawhinney said, noting US consumers are still struggling with heavy debt loads.
Mawhinney said the stock markets are currently “as attractive as they’ve been in many, many years.” As far as the Canadian dollar is concerned, Mawhinney said it was overvalued by 20% when it peaked last November.
“We think it may see some renewed strength as we enter 2009, but we don’t think it gets back to the 60 cent range and we don’t think we’ll see $1.10.”
On the trucking side, Mawhinney noted several trends in the US which he expects to continue, such as a decrease in average length of haul and rising bankruptcies. He said an increase in US truck tonnage earlier this year may have been misleading, since it had more to do with a rise in exports and flooding in the US mid-west that put rail lines under water, than any economic rebound.
“We think, as we go forward, you’ll see tonnage come down because as the economy comes down, tonnage comes down and prices come down,” he said.
He also said while freight rates have risen in the US, again it’s deceiving because much of that is due to the fuel surcharges which will be reduced as diesel prices decrease. It’s not necessarily a reflection of the health of US trucking firms, Mawhinney pointed out.
Mawhinney also said he expects US trucking bankruptcies to continue as a global recession puts further strains on trucking companies.
The overall verdict? Mawhinney said he expects the US to emerge from a recession in late 2009, paving the way for a better 2010.
“Lots of people think it’s going to be a longer term recession,” acknowledged Mawhinney. “Our feeling is that the federal banks have acted forcefully and quickly, and they will get to the point where they can actually get credit moving again and get confidence restored for an improving trend in the last half of 2009.”
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