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Economist: Don't Panic About Recovery; Trucking in for Good Times

Continued high unemployment and three quarters of less-than-3-percent GDP do not mean we are headed into a double-dip recession. In fact, things are looking very good for trucking in this recovery, said trucking economist Noel Perry, speaking at the McLeod Software User Conference in Birmingham, Ala., Monday. However, he said, carriers need to learn how to deal with a more volatile business environment.

Perry, principal of Transport Fundamentals and former economist for Schneider National and Cummins, laid out the principle parts of an economic forecast. And the first part, he said, is that you have to understand where you are now. People think we're still in a recession, he said, but the data shows that's simply not true.

Only one recovery in the last 60 years did not keep going, Perry emphasized. And the 1981 recovery died, he said, because the Reagan administration deliberately decided it was more important to address inflation concerns. No one in Washington on either side of the aisle, Perry said, is about to do that today.

One factor people point to as evidence that the recovery is stalled is continued high unemployment. Perry said "there's no reason to panic" about it; it's normal. If you look at the 1991 and 2001 recoveries, we still had recoveries despite high unemployment.

"A smart manager doesn't hire until the people you've already got are working overtime," he explained. "Once that happens, you get people optimistic enough to start hiring." That's why Perry says an important economic statistic to watch is earnings, because if they're going up, that means we're moving toward that goal. And, he said, earnings are up.

Yes, growth in the economy has slowed compared to earlier in the year. Part of the reason, Perry said, is that the government stimulus is running out. However, he said, again it's not unusual for the economy to fall below the 3 percent growth level considered "normal" during an economic recovery. We have had three such quarters in this recovery, he said. In the last five recoveries, they've all had at least two such quarters, and the last couple have had four such quarters.

We are, however, looking at a slow recovery, he said, just as the last two were. "We seem to be entering a new era of recoveries," he said, where recoveries are slower than in the past. The recessions that happened between 1948 and 1981, he said, were recovered from pretty quickly.

The good news for trucking, Perry said, is the mix of this recovery. There is basically no growth currently in services, which have become a huge part of the economy, as much as three-quarters of it. But the people who buy goods, which are what create truck freight, have started to buy again. If you just look at the goods segment of the economy, he said, it looks like an almost-normal recovery. "So you can have Christmas for trucking when there is no Christmas for the economy."

This has been a manufacturing-led recovery, Perry said. Manufacturing would be even better if it weren't for the increase in the trade deficit. Good news, however; the trade deficit is now falling again. And that's good for trucking, because trucks move the raw materials needed to manufacture goods for export; on imports, there's only one move, of the finished product.

Areas for Concern

Nevertheless, there are still some reasons it's smart to be cautious, Perry said. It's still going to take some time for the housing market to get back to equilibrium. In the past, he said, there were typically about 2 million existing homes for sale in the U.S. at any given time. We got up to 4.5 million. Until we get that back to about 2 million, he said, you won't get a lot of people building new homes. We're only about a third of the way back to normal, he said.

Another concern is the availability of credit. Today, he said, high-risk borrowers - about a third of consumers and businesses - are paying high prices for credit, if they can get it at all.

Long term, he said, he also has concerns about the amount of money the U.S. government has been borrowing. If you look at it as a percentage of gross domestic product, we're about in the middle of the pack compared to other developed countries - unlike Japan or Greece that are way overborrowed. However, on an absolute level, the U.S. is in second place, almost $8 trillion in debt, he said, right after Japan's $9.7 trillion. "At some point our creditors are going to figure out we're not as good a risk as they thought we were," Perry said.

Optimism in the Short Term

Yet there are many positive indicators, especially for trucking. For instance, he said, corporate earnings for the S&P 500 companies are nearly back to record levels. "So there is plenty of money to fund projects once the people who control the purse strings get some euphoria," Perry said.

China and other developing countries have been a major force in driving the recovery. "International trade is really important to our economy," Perry said, predicting that by 2020, half of all our freight will have an international touch.

Perry predicts that truck tonnage will grow more rapidly than gross domestic product - 4 percent annualized on a quarterly basis. And because companies did so much "right-sizing" during the recession, in addition to a larger number of carriers that went out of business altogether, it doesn't take much freight growth to cause a capacity crunch. "Even though we're only a year and a half form the bottom of the worst recession in our lives, we're already in tight capacity," he said. In fact, he predicted that we're heading for a "spectacular" shortage, driven by a lack of drivers.

In general, carriers reduced their overhead by about a third during the recession. The problem is, Perry said, that has left carriers without the capacity needed to hire drivers. It takes people to recruit, screen, hire and train - people who have been laid off. Driver pay also fell during the recession, both in comparison to other jobs and in relation to consumer prices.

Add to this regulatory changes such as CSA 2010, likely revisions to hours of service, a likelihood we will see more carriers required to use electronic logs, and a new 2011 requirement requiring proof of citizenship for driver's licenses, and the total effect, Perry says, will be a driver shortage twice as bad as the one the industry saw in 2004.

The capacity crunch, Perry said, will be good news for carriers, but "it will be a life-changing experience for the shippers." Perry examined the potential costs of a missed load for shippers, noting that switching shippers to save $250 on a load will not be viewed favorably if that results in a missed load, which costs many times as much. During the recession, because of surplus capacity, missed loads were rare, so many shippers were ruthless in driving down rates. Now, he said, those shippers "are about to be yanked into supply chain reality."

Flies in the Ointment

Of course, a good forecast not only looks at the "base case" but also at potential risks.

Perry cautioned that, "If I knew what the future holds, you wouldn't be listening to me, you'd be worshipping me."

The base case is a slow recovery. We're very close to what happened in 2002 and 2003. However, although the slope of the recovery line for this recovery and the previous two are very similar, we're starting from a much deeper hole. This recovery, he said, is without precedent, so it is probable there will be some surprises. One possible risk is a collapse in manufacturing, as happened once before, so manufacturing numbers are a key economic indicator to keep an eye on.

Then there's the upside risk. What if this recovery comes roaring back next year and we look at 2011 being a really good year and 2012 being spectacular? Perry urged the audience to spend at least a little time sitting down and thinking about what they would do if we get a relatively normal recovery. How will they take advantage of it?

Long-term, Perry believes, we are looking at an economy that is more volatile. The time frame between peaks and valleys is shortening, and the peak-to-trough span is much greater. Back in the Reagan-Clinton era, when the economy was on the rise for over six years, Perry said, people had lots of time to get rich. Today, he said, you've only got nine or 10 quarters. It requires a more rapid response to take advantage of the good years.

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