The Outlook is Improving

By Chief Economist Walter Kemmsies of Moffatt & Nichol

With all the contradictory remarks by analysts and policy debate, it can be difficult to see that the near term outlook is decidedly better than it has been at any time over the last 12 months. Beyond that the outlook is not conclusively negative either. It is important not to weight future expectations too heavily on current conditions.

As of November 2008, the debate was on whether the U.S. and potentially the global economy would enter a depression. These days the focus has shifted to: when will the recession end? There will still be nay-sayers and many will express their impatience. However, an economy with a population of 308 million people and a GDP of $14 trillion does not go from bad to good overnight. The initial estimate for real GDP growth in the second quarter of 2009 indicates a contraction of 1 percent, following a 6.4 percent decline in the first quarter and a 5.7 percent decline in the fourth quarter of 2008. It took some time for things to fall apart and it takes time for the economy to heal. So far,the data indicates that the economy is on track to expand in the second half of 2009.

Underlying the recovery is combined the effect of aggressive expansionary fiscal and monetary policies, not just in the U.S., but also in Europe and Asia. Large amounts of liquidity have been pumped into the global economy by the world’s central banks. By our estimates, fiscal stimulus spending around the world in 2009 is somewhere between $1.5 and $2 trillion. When central banks and governments around the world take coordinated action, it isn’t safe to bet against near-term economic recovery.

Credit market conditions had been deteriorating since early 2007. Many smaller regional banks have failed since the real estate market began to collapse in 2007. Lehman Brothers bankruptcy filing in September 2008 was the death knell for financial markets. While it is likely that more small regional banks will fail in the coming months, the system appears to be past the worst point with many larger banks returning to profitability. Bond issuance is increasing and loan volumes seem to be past the trough.

While the unemployment rate has risen to a high level this year, since March the number of new unemployment insurance claims filed each week has declined. The number of continuing claims has also peaked. Given that construction activity has picked up, particularly for the public sector, it is likely that some of the unemployed have been finding jobs.

US exports have been improving since the trough levels reached in February. To some extent this is due to the dollar having devalued against other major currencies. However, rising exports also reflect demand growth in other parts of the world. Some ocean carriers have realized this and there is talk of hiking carrier rates for goods flowing from the US to emerging markets.

These trends are reflected in the performance of financial markets. Major stock market indexes have, as of early August when this column is being penned, risen nearly 50 percent from the March troughs.

Historically, share prices begin to rise on average about six months before economic expansion begins.

For now economic recovery is dependent on policy support. The question of whether more policy support will be needed to sustain the recovery presupposes that employment will not grow much and that American consumers will react to their financial losses from the last few years by maintaining high levels of saving. High levels of saving are needed to finance capital investment, which in turn supports economic growth. However, consumer spending accounts for 70 percent of GDP. If during periods of economic weakness everyone tries to save more, then growth cannot resume. This is known as the Paradox of Thrift.

Beyond the near term, the prospects for the economy depend on whether consumers will loosen their purse strings enough to allow the economy to expand without policy support. Forecasting consumer behavior over the next several years is more difficult now than at any other time in the last few decades. Given that there are a large number of baby boomers close to retirement, it is not clear that consumer spending will perk up for more than a quarter or two during the period when the economy first begins to expand. But economic data shows that older people spend less on goods than on services. It is possible that a lot of the spending on imported goods during the last 10 years or more was not done by baby boomers. It is too soon to throw in the towel on consumer spending.
While the debate about the consumer continues, it is important to remember that other factors also impact the volume of trade. Last month this column focused on the importance of structural factors such as outsourcing to cargo growth at ports. Import substitution has accounted for a lot of trade volume growth. If consumer spending trends are weak, trade volume should benefit from continued accelerated outsourcing. Therefore, although a significant rise in consumer spending from current levels is good for the transportation sector, it isn’t the only game in town.

All in all, the outlook is better than it was one year ago. We avoided a depression. Economic recovery is not years away. While the transportation sector is still some distance from being healthy, it is not reasonable to project current conditions of low freight rates and excess capacity into the long term. And it’s very premature to conclude that the best days of the transportation sector are behind it.

In This Issue

Up Front

News, Trends & Analysis
New Items

The outlook is improving

Supply Chain
Federal chassis rules: Are you ready?

Working with the public sector

How will your company deal with Sarbanes-Oxley

Features
Gateway at a glance –Southern California

Six case studies in green

Ports & infrastructure
Nowhere near a Peak Season this year

Port Products
Green port product review

Commentary
Sustainable: The new buzz word

On the Horizon
Expect to see more LNG fuel stations in the future

Casualties