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Fearing the “spillover” effect

Jan. 18, 2012

CFOs are worried about the spillover effect from the European [sovereign debt] situation into global consumer and capital markets. They appear to believe that the longer we continue without effective solutions, the more likely and more pronounced the collateral effects will be on other established and emerging economies around the globe.” –Sanford Cockrell III, national managing partner for the CFO program at global consulting firm Deloitte LLP

Truckers are well aware of how “spillover,” as characterized by Deloitte’sSanford "Sandy" Cockrell (seen at right) in the quote above, can impact the freight business.

I mean, just take the effort to reduce truck exhaust pollution over the last decade for example. Fleets were so concerned about the cost and reliability of 2007 emission-compliant trucks that it sparked a tremendous surge in new truck sales ahead of the compliance date, despite a nose dive in freight volumes – the first of many warnings about the impending arrival of the “Great Recession.”

As a result, record levels of North American Class 8 factory shipments in 2006 and 2007 – some 371,916 and 201,278 brand new units, respectively – plummeted to only 119,714 by 2009, according to data tracked by FTR Associates. And the impact of that artificial spike lived on for years; indeed, it’s created used truck inventory issues that will remain in force well into 2014.

So when CFOs across a range of businesses start worrying about how the negative “spillover” from Europe’s sovereign debt crisis might hammer the global economy – and thus the freight volumes associated with economic activity – it warrants the attention of truckers on this side of the pond.

The Deloitte quarterly Signals survey – which tracks the thinking and actions of CFOs representing many of North America's largest and most influential companies – shows only 27% of them were more optimistic in the fourth quarter of 2011, compared to 29% in the third quarter and a whopping 60% in the first quarter of last year.

Economic uncertainty was the most worrisome risk for almost all surveyed CFOs, noted Deloitte, with continued fallout from Europe’s sovereign debt crisis, persistent unemployment, increasing social unrest and governments' efforts to find effective solutions casting a long shadow over their expectations.

Let’s be clear, too, that these are CFOs at some pretty big firms; ones with the resources on hand (one would think) to take some rough economic going in stride. In fact, more than 75% of the CFOs polled by Deloitte are from companies with more than $1 billion in annual revenues, and more than 70% of them are from publicly-traded companies.

So how is the concern over “spillover” affecting the outlook of these finance executives? In response, Deloitte’s survey found that CFOs are striking a cautious tone toward their growth and hiring plans for 2012, specifically, tempering expectations for year-over-year revenue growth (6.3% in the fourth quarter of 2011 versus 6.8% in the third) as well as projections for domestic hiring (1% vs. 1.2%).

“Just 30% of CFOs expect their home economies to be in better shape a year from now and only about 10% expect conditions to be markedly better three years from now," explained Greg Dickinson (seen at right), who leads the Deloitte CFO Signals survey

Still, he pointed out that, on the bright side, CFOs have raised their projections for year-over-year capital spending (9.6% vs. 7.9%) and their outlook on earnings growth (10.1% vs. 9.3%).

“The silver lining may be that, although CFOs have been steadily trimming their expectations since the first quarter of 2011, many of their earnings and investment projections are still positive year-over-year,” Dickinson added.

Here are some other findings from Deloitte’s quarterly CFO survey:

• Externally-driven pessimism remains at the heart of CFO gloom. Only 6% of CFOs say they are more optimistic for externally-driven reasons in the fourth quarter of 2011, down from 9% in the third.

• Unrelenting volatility and uncertainty are making it difficult for companies to provide earnings guidance. CFOs say their companies are increasingly choosing to provide conservative estimates (24%) or not to give earnings guidance at all (37%).

• CFOs say their companies' top three challenges include revenue growth from existing markets (54%), framing and/or adapting strategy (41% in the fourth quarter of 2011, up from 34% in the third), and prioritizing investments (39%, up from 18%).

• Companies' focus on revenue continues with 53% of companies' strategic focus on revenue growth/preservation, with 35% focused on revenues in existing markets with 18% on new markets.

• As for the risks they monitor, CFOs report strategic risk (66%) tops the list, followed by compliance and regulatory risk (48%) then financial risk (48%)

All of that, of course, is taken from a “big picture” perspective of the global economy. On a smaller scale – namely, the freight market here in the U.S. – the impact of “spillover” on volumes isn’t bad at the moment.

Transportation analyst Benjamin Hartford with Wall Street firm Robert W. Baird & Co., for one, believes more positives than negatives exist right now for U.S. truckers.

In the firm’s monthly Freight Flows brief, Hartford said that though Baird expect slowing growth rates in both demand and pricing to continue in upcoming months, positive growth should also continue across all modes in 2012.

Here are some other key findings from Baird’s snapshot of the transportation industry:

• Slowing but solidly positive U.S. freight pricing growth will continue to be supported by tight TL capacity. Baird expects contractual truckload rate growth of 2% to 4% year-over-year in 2012; a rate that meets or exceeds underlying cost inflation. Tight truck capacity and real TL pricing growth supports solidly positive rate growth across domestic U.S. modes.

• Industrial freight demand looks more favorable than retail right now. Solidly positive U.S. industrial production outlook (3% year-over-year) supports modes with industrial freight exposure (rails, parcel, LTL).

• Similarly, the near-term domestic U.S. freight outlook is far healthier than the international freight outlook. Near-term international freight outlook remains choppy given global economic uncertainty, Baird noted.

• Finally, Inventories remain lean, particularly within retail channel, but no near-term “re-stocking” catalyst is expected. Retail shippers remain guarded on appetite for inventory risk given lack of near-term visibility to consumer demand. However, retail inventory/sales at/near all-time low, limiting the downside risk to freight volume growth.

Thus, if the risks of “spillover” can be minimized, trucking should find a slow but steady road to travel as 2012 gets rolling.

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