Through the turmoil

Oct. 1, 2007
What does the turmoil gripping the financial markets mean for trucking? If you thought the credit market mess was a problem only for folks who stretched too far for a home mortgage, and that there was no connection with trucking, think again. Probably the most severe impact is on homeowners who are losing their properties through foreclosure, and real estate agents, mortgage brokers and others who

What does the turmoil gripping the financial markets mean for trucking? If you thought the credit market mess was a problem only for folks who stretched too far for a home mortgage, and that there was no connection with trucking, think again.

Probably the most severe impact is on homeowners who are losing their properties through foreclosure, and real estate agents, mortgage brokers and others who are losing their jobs. These numbers climb by thousands each week, and each one represents a loss of buying power for the things a truck brings. Freight traffic, which was already tepid for some items, will get even chillier.

As thousands of foreclosed houses go back on an already saturated housing market, housing starts will fall further. Traffic in homebuilding and remodeling products will shrink some more.

In previous decades, the lenders that imprudently issued mortgages to unqualified borrowers would have borne the pain. But in the past few years, a variety of complex new securities and debt instruments have spread the consequences of the defaults throughout the financial system.

The magnitude of the defaults is still not apparent. There are millions of borrowers with adjustable-rate mortgages that had low initial “teaser” interest rates that will be “resetting” in the next few months. These borrowers will face higher interest rates and monthly payments — in some cases, much higher. Nobody knows at this point how many of those homeowners will “mail in the keys” rather than pay higher amounts.

That uncertainty has spread the pain to companies that have nothing directly to do with mortgages or even retail freight. Lenders that must set aside reserves to cover actual or anticipated mortgage losses have become much more conservative about their lending to businesses.

As a result, many companies are finding it harder to borrow the money they need to finance inventories, equipment purchases, and other freight-generating activities. Thus, carriers serving any type of shipper may find demand for trucking services is less robust than it was a few months ago.

Carriers themselves may find the lending window shut if they try to borrow money for working capital or new truck purchases. They also may find the truck dealer, manufacturer or leasing company they used no longer has access to capital, at least not on the same terms.

Unfortunately, carriers are almost sure to find that hauling freight will cost more than it did a year ago. Even if prices don't go higher in the last few months of this year, they will end the year 30 or more cents per gallon higher than the $2.60 average at the end of 2006. But in a market with softer demand for trucking, passing along high fuel costs may be impossible.

These grim prospects are not a sure thing, however. The economy is apparently still growing, albeit at a slower pace than in the spring. Some of the growth is in freight-intensive activities, such as nonresidential construction. Personal income is growing, inflation is low and the unemployment rate remains very low by historical standards. These factors mean that consumers, businesses and governments will all continue to generate demand for trucking.

The bottom line: The credit-market turmoil dominating the business news may seem baffling or remote from the day-to-day world of trucking. But the financial mess is likely to have unpredictable and possibly severe consequences for all types of carriers, whether or not they are trying to borrow money. How severe remains to be seen.

About the Author

Ken Simonson e-mail: [email protected]

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