Economists Warn Industry Painful Recession Lies Ahead
By Rip Watson, Senior Reporter
This story appears in the Oct. 13 print edition of Transport Topics.
NEW ORLEANS — Fleets can expect freight markets to weaken even further as U.S. businesses trapped in a credit crunch grapple with a recession during the rest of 2008 and throughout 2009 that could be the worst in 25 years, experts said.
“We are going to have a long, deep, painful recession,” said Mark Vitner, senior economist for Wa-chovia Corp., who has scaled back his 2009 forecast for gross domestic product by 2 percentage points because of U.S. housing troubles, tight credit and weaker growth overseas. “This recession is going to be more like 1981 and 1982 than the last two [in 1991-92 and 2000-01].”
Speaking at American Trucking Associations’ Management Conference & Exhibition here, ATA senior economist Bob Costello took a similar view, saying, “You have to be prepared for the cycle to get worse before it gets better.”
They delivered their projections Oct. 6, as U.S. financial markets that have been clobbered by tight credit markets, rising unemployment and other sour economic indicators continued to lose ground. Despite the completion of a $700 billion federal package intended to shore up credit markets and temper investors’ fears, the Dow Jones industrial average has lost about 11% of its value in barely two weeks.
Costello said freight markets have been deteriorating since July after a first half of 2008 that “wasn’t
terrible.” While he was reluctant to forecast tonnage changes into 2009 because of recent turmoil in the financial markets, Costello said he expected a tough ride for the balance of this year.
“What scares me is the fall freight season,” he said. “How is the consumer going to go out there and spend for the holidays? I expect spending will be negative,” meaning that it would be lower than last year.
ATA’s truck tonnage index has been slipping for the past three months on a month-to-month basis, although there have been 10 consecutive months of growth over the same month of the prior year.
Costello said he expects the pace of business failures to increase in the coming months from the total of 1,905 fleets that failed in the first half of this year, possibly topping the record number of fleet bankruptcies in 2001.
“They will get worse before they get better,” he said. “It all depends on how long it will take to get credit flowing.”
Tighter credit is hurting everyone, from retailers to auto dealers who need to pay for inventory or find funds for loans to buyers. With a record 56 cents per dollar of Americans’ money going for basic food, energy and health-care costs, the battle for what’s left is escalating, Vitner said.
“Home Depot is competing with Abercrombie & Fitch and Applebee’s for the same consumer dollars,” he said.
A longer, deeper recession could extend for 16 months like in 1981-82, Vitner said, nearly twice the length of a typical downturn.
Fox News Correspondent Stuart Varney, who moderated the panel, was more optimistic, saying, “One year hence we will be looking at the other end of the trough.”
As the U.S. economy flounders, business also is slowing in China, India and Russia, which had been three of the world’s fastest-growing economies, Vitner said. He raised the prospect that U.S. unemployment could reach 8%, or about two percentage points above the most recent statistics.
Despite the forecasts, panelist Pete Ruane, chief executive officer of the American Road & Transportation Builders Association, saw a silver lining if the federal government decides to spend the nearly $500 billion on transportation infrastructure he said is needed.
“It can be done if we have the political will,” Ruane said. “We can stimulate employment. This [financial situation] is an incentive for Congress to get off their rear ends and do something for America’s infrastructure.”
Asked how he would propose to pay for those repairs at a time of escalating federal deficits, Ruane proposed a combination of tax increases, user fees and a modest hike in federal fuel taxes that is indexed for future inflation.
“I am optimistic we can get something done next year” in highway legislation reauthorization, Ruane said.
Vitner concurred with Ruane’s approach to ending the recession. “One of the ways to work out of that is to spend more money on infrastructure.” He cited the lack of state funding to rebuild the Blue Ridge Parkway, a leading North Carolina tourist attraction built during the Depression.
A global downturn could also help fleets by cutting fuel costs.
Since “demand is sinking like a stone,” Vitner believes crude oil prices could fall farther than the steep decline to about $90 last week from a record $145 a barrel three months ago.
“Falling oil prices are one of the good things in the marketplace,” Costello said. “That is a definite positive for truckers.”
When diesel skyrocketed to a record $4.76 a gallon in July, some fleets were paying more to run their trucks than they were paying in wages and benefits.
