Trucker 329 Perry Close 1

Recession chances creep into economic outlook

Nov. 12, 2015
“This is the time to be sucking up to your customers like crazy. Because your customers know your exposure [to the regulations] is out there, they’re much more likely to do long-term deals with you now.”  —Transportation economist Noël Perry “The 3PL market is going to continue to grow; carriers are going to continue to thrive. 2016 is going to be a remarkable year if you take advantage of it.” —Internet Truckstop Group founder and CEO Scott Moscrip

DALLAS. Keep your friends close and your shippers closer, truckers: A recession in the U.S. becomes increasingly likely over the next three years, noted several transportation analysts this week.

Indeed, the R-word worked its way into numerous presentations at Connected 2015, the user conference here.

Economist Noël Perry, senior consultant for FTR, cautioned the gathering of brokers and carrier representatives about the possibility of a significant economic downturn, and while the chances next year are small at 15-20%, they climb to 35% in 2017, with the “cumulative probability”  for 2018-19 being “almost certain.”

“Now is the time to go long on your relationships with your customers,” Perry said. “Lock in your relationship so you are the guy who gets the freight, not your competitor.”

Businesses need to make sure cash flow is solid, and “now is not the time to spend big capital” unless, Perry qualified, there’s a two-year return on that investment. He also noted that many carriers already have been purchasing new equipment, and that will give them an advantage in terms of lower maintenance costs as fleets weather the poor economy.

“It isn’t something I would be putting in your business plans for next year, but it’s something to begin to think about,” Perry said. “Once we get into ’17 and ’18 it becomes a realistic issue.”

From the shipper perspective, NASSTRAC Executive Director Gail Rutkowski confirmed the importance of those relationships.

“Shippers have long memories,” she said. “They remember who helped them out and who didn’t. They’re going to go back to those folks that they can rely on and trust. All the technology in the world isn’t going to replace that relationship—and it works both ways.”

Economic indicators

In an earlier session, Bloomberg Intelligence transportation and logistics analyst Lee Klaskow pointed to the strong dollar’s impact on exports and a “cool down” in manufacturing, which directly impacts truck tonnage. Likewise, a drawdown in inventory levels has meant “not much of a peak season” for freight this fall.

Indeed, according to the latest Bloomberg/ quarterly survey of owner-operators, truckers are becoming more pessimistic in their outlook.

“In the third quarter, going into peak season, when pessimism increases that’s not a good sign,” Klaskow said.

On the upside, those overstocked  inventories should be significantly reduced by the end of this year, which bodes well for freight in 2016. The consumer market, a much larger slice of the economic pie, is showing “tepid” growth—but “growth is growth.”

In an executive roundtable discussion, Stifel Research Managing Director John Larkin quipped that the U.S. dollar is “the best looking house in a crummy neighborhood.”

He likened the economy to a four-speed automobile transmission: The post-Great Recession recovery reached third gear by 2014 and was headed into overdrive, but the comparatively strong dollar along with the collapse of the domestic energy market made for a “mediocre” second-gear performance in the first half of 2015.

Larkin, too, noted the inventory draw down and the absence of an import peak at the Southern California port—along with the correspondingly soft trucking activity data—and that put the economy in first gear in the third quarter. And it had shifted into neutral by October.

“The big fear is we’re going into reverse, grinding the gears in the process,” Larkin said.

He noted that transport and logistics stocks have been “hammered” in 2015, and many investment analysts believe these stocks are a “precursor” to the direction of the broader economy—which, with weak volumes and “much looser” capacity, suggests a recession as early as next year.

“With such an accommodating monetary policy, and interests rates that are still so low, it seems unlikely,” Larkin said. “But if there’s some external shock, like a war in the Middle East, that could move us to recession. We’re on fragile ground.”

Still, barring any shock, Larkin sees stability through 2016.

Rates and regs

In a subsequent roundtable, Perry agreed that 2016 most likely, will look a lot like 2015. But he took the opportunity to go into additional details on his admittedly “contrarian” views about the subsequent years.

He emphasized the critical role China now plays in the global economy, and tis impact on the U.S. Questionable economic reports from the Beijing government notwithstanding, “China is itching for a recession,” Perry said.

The global slowdown on top of a U.S. recovery “that is getting stale” bolsters a recession’s likelihood. To get a sense of just when to expect the downturn, Perry suggested that “freight multipliers,” or the ratio by which freight growth outpaces the overall economy, are a key indicator.

During the recovery, freight growth has been twice that of GPD, and the recovery has been “very good for trucking.” Indeed, that multiplier is well above the historical level expected two years ahead of a recession. And the ratio historically “goes negative” the year before a recession.

Of note, however, the freight ratio remained strong this year despite a steady decline in domestic manufacturing and industrial activity—and that’s contrary to past trends.

“You’d be a fool not be concerned,” Perry said.

And he repeated his advice that carriers and shippers should begin to plan for recession to begin in 2017—along with those plans for dealing with expected federal regulations that will have a huge negative impact on truck productivity and capacity.

“This is the time to be sucking up to your customers like crazy,” he said. “Because your customers know your exposure [to the regulations] is out there, they’re much more likely to do long-term deals with you now.”

But Internet Truckstop Group founder and CEO Scott Moscrip, who sat in on the roundtable, is more optimistic.

“I personally feel that next year is going to be a remarkable year for our industry,” he said.

Moscrip’s opening session forecast characterized 2016 for its Rs:

  • Regulation, “and it’s not going to be fun”
  • Rates: “an ugly year” as carriers emphasize the need for rate increases to cover those regulations and shippers push back with demands for cost savings in a softening economy; and, yet
  • Remarkable: “The 3PL market is going to continue to grow; carriers are going to continue to thrive,” Moscrip concluded. “It is going to be a remarkable year if you take advantage of it.”

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