The Road Ahead – Some Economic Forecasts for 2012

It is that time of year when many companies are in the process of finalizing their business plans and budgets for 2012.  We end 2011 with political upheaval in the Middle East, a major unresolved debt crisis in Europe, political gridlock in the United States and a slowing economy in China.  The United States still has the world’s largest economy that has been an engine of growth for so many years.  The U.S. is still Canada’s largest trading partner. However, as we saw this year, GDP growth of 3.5 percent cannot last forever.

As one reflects on where we have been and where we are today, there are large question marks about the potential economic growth we will see in the United States and in those countries that trade with it. Interest rates there are down to zero.  Two big stimulus initiatives have not pulled the U.S. out of recession. The U.S. has its own debt crisis and cannot continue to spend money, at least not the way it has done in the past.

U.S. consumers that got caught up in euphoria of ever rising home prices have seen their personal debt rise from 50% to 135% of annual income. But high unemployment, high under-employment, the drop in property values, and job retention fears, have created jittery consumers.  Since consumers represent 70% of total purchases, we have a big problem.  This problem cannot be overcome quickly, no matter what leader and political party is elected next year.

The bottom line on all of this is that there is no quick fix.  There is no political party or economic policy that can turn the ship around quickly.  The U.S. cannot spend its way to prosperity or cut interest rates to give Americans the “big bang” we would all like to see.  Two prominent economic minds (Jim Allworth, Vice Chairman of the RBC Investment Strategy Committee and Noel Perry, a senior economist with FTR Associates), speaking totally independently of each other, forecast the same future - - - slow GDP growth in the 2% range for the foreseeable future. While this may not sound too bad, when compared to what we have become accustomed to, this will likely make people feel that are stuck in quicksand.

What does this all mean to truckers and shippers? The pressure to maintain lean inventories will allow manufacturing to continue to grow at a modest pace, slightly in excess of 1.5% per annum for the next decade.  This slow growth will put the brakes on any rapid expansion in freight volumes.  Capacity will remain tight as carriers exhibit caution in adding to their fleets and as more regulation in the United States, (e.g. hours of service, CSA) reduces the labor pool.  Mr. Perry forecasts a gap as large as 500,000 drivers by the year 2014.  While fuel costs have moderated, rising equipment costs and driver pay will likely put upward pressure on costs.  Rates will continue to increase albeit at a moderate level.

The tug of war on freight rates between shippers and carriers will continue in 2012.  With slow business growth and economic uncertainty in 2012, shippers will continue to try to restrain increases in freight costs.  But tight capacity, rising equipment costs and competition for qualified drivers will put upward pressure on freight rates.  The New Year is shaping up to be another interesting one for transportation professionals.