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FTR: Uncertainty, overcapacity key themes for 2009 economy

In its "Recession Update" webinar for customers Friday, transportation research and forecasting firm FTR Associates painted a picture of a challenging 2009 economic environment, with many uncertainties affecting predictions for the end of this recession.


Things are changing so fast, noted webinar moderator Larry Gross, "it's like trying to catch a falling knife." The webinar was littered with what-ifs, and a lot of words like "unprecedented" and "completely new territory." Many economic forecasts are based on how previous recessions have acted, but there are some wild cards to this one, especially the problems in the financial markets, and what effect the stimulus package currently winding its way through Congress will or won't have, and when.



Friday morning, the U.S. Commerce Department reported that fourth-quarter Gross Domestic Product shrank at a 3.8 percent annualized rate, somewhat better than expected, but still the worst contraction since 1982. What's worse, a buildup of unsold goods, or inventories, made the numbers look better than they would have been otherwise. If you take out the jump in inventories, the decline would have been 5.1 percent.


"If you look at what's been going on over the last three months, it's hard to find much to be very joyous about," said Bill Witte, director of the Center for Econometric Model Research. "The first-quarter numbers have all the signs of being pretty dismal." He notes that the inventory numbers reported for the fourth quarter suggest that businesses this quarter, and possibly into the second quarter, will be reducing inventories, which could produce a fairly significant swing to the negative side.


"The downturn started with the housing market, [and] I see no signs in the data that a bottom is forming," Witte said. In addition, he said, the economy has been shedding jobs at a faster than expected rate, with December unemployment hitting 7.2 percent.


One bright spot: "There has been over the last three to four months a huge and very expensive effort by the government to try to improve the situation [in the financial markets], and I think there are some signs of progress," Witte said, saying the financial aspect of the situation is "returning to at least a semi-functioning status."


Witte showed two alternate forecasts, both of which call for the economy to start to recover during the second half of 2009, and in full recovery mode in 2010. However, he admitted, it's also possible that we will see a slower recovery than in past recessions. One unknown in that scenario is American spending and savings habits.


"One of the things that is clear is that American households have undersaved over the last decade and a half," he said. "Whether they will continue that is an enormous question. There may be a shift back toward the kind of saving rate that characterized the U.S. economy in the '70s and early '80s, which was on the order of 8 to 10 percent, as opposed to zero recently. That will be very difficult for the economy and means that growth in the economy will be slow for a more extended period." If that happens, he said, instead of having a fairly robust economy in 2010, it will remain sluggish through 2010 and even into 2011.


Noel Perry, managing director and senior consultant for FTR, noted that from a freight standpoint, this recession started three years ago. That, he said, raises the question of cumulative stress on the industry as well as what's currently happening, which basically is freight in freefall, he said.


Expect freight rates to fall and more trucking companies to start going bankrupt, said the FTR analysts. Up until about the third quarter of 2008, fleets were able to keep rates pretty stable. As freight levels have fallen off the cliff in the past few months, though, don't exact that to still be the case. Fleet financials for the fourth quarter have commented on the tight competition for freight. Also, the buffer that fleets had in the second half of last year with rapidly falling fuel prices is going away as fuel prices flatten out.


"All through the latter part of the year, truckers were getting a nice little boost in cash that kept them from going into the trauma you would have expected given the freight environment," Perry explained. That's just the way fuel surcharges work -- you have a negative cash flow as prices go up, but positive cash flow as prices go down. "In the last five to six weeks, fuel prices have flattened. ... The traffic managers of the world will be under much greater pressure to cut costs in the first quarter." A number of customers, he reported, have already pulled forward their contract negotiations into the first quarter.


This is also all bad news for those involved in selling trucks and trailers. There's nowhere for those extra trucks to go except being parked. As the economy starts to come back, fleets will start putting those parked trucks back into service, not buying new ones. FTR has dropped its Class 8 North American forecast for 2009 to 135,000, but it may still go lower. Eric Starks, FTR president, pointed out that when you look at truck sales at an annualized rate, December numbers were at a rate of 104,000, and at 119,000 for the fourth quarter. Their worst-case scenario is 95,000 North America sales. That could get even worse, as Mexico demand has dropped essentially to zero.