The Risks of Delayed Action

By Chief Economist Walter Kemmsies of Moffatt & Nichol

Despite the weakness in the industry during the first half of 2009, and the fact that, through August, there has been no apparent
pick-up in imports for the holiday spending season, it is too risky to project the trends of the first half of the year into the last quarter. As we indicated in our outlook for 2009, the economy is likely to recover in the second half of the year. By the time this column is published, the Department of Commerce will have published the initial estimate of third-quarter GDP, which we expect to be the first quarter-on-quarter growth in real GDP in over a year.

Fourth quarter could see the highest growth rate of the last several years. The weakness in port, rail and truck data going into the peak season is thus more indicative of importers delaying their decisions until the last possible moment to avoid the risk of a poor holiday spending season - leaving them with excess inventories. Delaying orders may ultimately prove to be costly since there has been a
reduction in capacity in some segments of the industry, which could prompt substantial increases in freight rates in the fourth quarter. Thus, avoiding the risk of being over-stocked may come at the expense of lower profits due to higher freight rates.

Bleak first half of 2009
It is understandable why many industry decision-makers have been hesitant in the face of recovery expectations. Industry data for the first part of 2009 painted a grim picture. Port volumes through July were approximately 20 percent below the levels during the first seven months of 2008. Likewise, the Association of American Railroads reported intermodal volumes about 17 percent below 2008 levels, and the American Trucking Association reports volumes through July running about 15 percent below the levels of a year ago.
Macroeconomic data in the first half of 2009 was equally grim. Retail sales from January to July were 10.3 percent below the same period in 2008, while unemployment rose from 7.6 percent in January to 9.4 percent in July. Consumer wealth has declined
significantly due to falling house prices and lower values for financial assets — the S&P 500 in August (when this column was penned) was still 33 percent below its peak level in 2007.

With trends such as these, it seems reasonable to expect retail sales during the peak holiday shopping season in 2009 to be in line with the year-to-date trends. But it isn’t reasonable. There are clear signs that the economy is past the worst point of this cycle.

2009 ends on higher note
The Federal Reserve has lowered its target for the Federal Funds interest rate — the rate at which banks borrow and lend funds they have on deposit at the Fed — to zero per cent, and has virtually doubled the size of the monetary base, thus supplying ample liquidity. The stimulus program (American Recovery and Reinvestment Act) is funding infrastructure development which is generating construction jobs. The “Cash for Guzzlers” program helped increase car purchases, which also helped employment."

Closer inspection of the unemployment data reveals that rate of decline has slowed appreciably since the first quarter of 2009. The unemployment rate in July declined to 9.4 percent from 9.7 percent in June, which is consistent with weekly declines in continued claims for unemployment insurance that peaked in March. The inventory-to-sales ratio peaked in January and has been declining. Even before the Cash for Guzzlers program was deployed, auto sales had begin to improve. More employment is expected to be generated as the TIGER (Transportation Infrastructure Generating Economic Recovery) funds are deployed. The programs funded by TIGER are supposed to be shovel-ready in February.

The financial crisis was the epicenter of the economic contraction, mainly as a result of large exposure to the real estate market. However, the housing market has improved over the last few months and bigger banks are reporting rising profits. Despite that, more
bankruptcies are likely, since historically they tend to peak about one to two quarters after a recovery begins. However, that is the final phase of an economic recovery and should not be viewed as a deterrent to recovery; instead, it is part of the process of freeing up resources to be used in more productive ways.

Japan and many countries in the European Union reported GDP growth in the second quarter for the first time in a year. Emerging market economies like China, India and Brazil never went through a recession and have recently reported a rise in their GDP growth rates. Along with the weak dollar, these trends support U.S. exports.

Further signs of improvement will prompt import orders
The ultimate confirmation that a recovery has taken hold will be an increase in consumer spending. This will happen as the economy and consumer confidence recovers. It is important to recognize that after suffering a significant decline in household wealth, consumers are unlikely to spend as freely as they have in the past. Many Baby Boomers will have to postpone their retirement plans and will be more interested in saving than spending. However, younger people generally spend a larger proportion of their incomes on goods than older consumers do. Therefore, some rebound in consumer spending should be expected. With inventories at low levels, this could catch many businesses by surprise.

Retailers and consumer goods manufacturers are likely to have postponed their orders so they could gather more information about the potential level of holiday spending. If so, then July and August data would be weak. However, further indication that the economy is recovering should then prompt a rush of orders. As my colleague David Bennett points out in his column this month, this could see a significant jump in freight transportation rates, given that there has been a substantial reduction in capacity. A rise in freight rates would be a clear indication that the recovery is taking hold and represent a potential cost for delaying orders.

In This Issue

Up Front

News, Trends & Analysis
New Items

The risks of delayed action

Supply Chain
Is your service provider compliant?

Does that belong in my port?

Features
Grading the carriers: How are your service providers doing?

Gateway at a glance: China

Ports & infrastructure
Port Productivity Tools: Six success stories

U.S. ports downsize staffs in new economy

Port Products
RTGs and reach stackers

Commentary
What’s on the horizon?

On the Horizon
Fleets of the future: The Chameleon

Casualties