Headed for a downturn

The economy`s ben red-hot for the last eight years, but there are unmistakable signs that it`s cooling.

By Etta Walsh, Senior News Editor -- Logistics Management, 1/1/2001

It's the subtle subtext of any conversation about the economic outlook for 2001 - there's a whiff of uncertainty, a modicum of concern. Analysts are offering cautious projections for this year. The last eight years have seen a terrific, robust economy in the United States. But now experts believe it may be heading for a downturn.

It's been a good run. The unemployment rate is the lowest it's been in 30 years, U.S. median household income is nearly $41,000 (a record), and the U.S. Federal Reserve has inflation under control.

But there are signs that the coming year will be more challenging. The higher prices for fuel, the financial landscape littered with remnants from the burst dot-com bubble, the flat output from factories in last year's fourth quarter - all these factors are dampening prospects for an equally robust 2001.

Lesser Expectations

The Blue Chip Economic Indicator monthly survey of business economists, which forecasts economic growth, inflation, and other critical indicators of business activity, shows that experts have revised their expectations of a possible recession upward. Last August, 18 percent predicted the economy was headed for recession. By November, the number had climbed to 23 percent. Executive Editor Randell E. Moore told Logistics Magazine that he expected the December report, issued after Logistics went to press, to show a further downward trend.

In one month, from October to November, more than half of Blue Chip's experts - 58 percent - reduced their forecasts for growth in real gross domestic product (GDP) in 2001. More than half also revised real GDP growth estimates for 2000 downward to 3.3 percent from the previous estimate of 4.1 percent. In comparison, GDP grew 5.0 percent in the United States in 1999.

Figures for October brought additional evidence that the U.S. economy was in the midst of a transition to slower growth, according to Blue Chip. Real GDP growth slowed to 2.7 percent in the third quarter, compared with 5.2 percent in the first half. In addition, the National Association of Purchasing Managers' index of manufacturing activity dropped to 48.3 percent in October (the lowest level since 1998). This is the third NAPM reading in a row below the make-or-break 50-percent mark, indicating a contraction in factory output.

Analysts at the New York City investment house Bear, Stearns & Co. Inc. are similarly cautious in their projections, noting that George W. Bush's razor-thin victory margin in the national election has created a presidency hobbled by lack of a clear mandate. The new president is facing congressional gridlock and will therefore make only modest progress in cutting taxes, according to the Bear, Stearns prognosis. The sudden uptick in the unemployment rate, coupled with slowing retail sales in October, may also be signaling a downturn, they noted in a November economic update.

There are other signs that the economy is slowing: After four years of double-digit growth, non-residential investment will almost certainly fall off. In addition, many high-tech companies issued "warnings on earnings" toward the end of 2000, cooling investor enthusiasm. Blue Chip experts expect corporate profits to grow a modest 4.6 percent this year, compared with 12.5 percent in2000.

The United States is not alone. Economic growth in Asia is expected to slow (with the exception of Japan, which is projected to show 2.0-percent growth for 2001); Europe and England are projected to experience modest growth of 3.2 percent.

Feeling Fuel-ish

Of course, the stock market is not the only factor dampening expectations for business and industry. There are other challenges looming as well.

One of the biggest - at least where the logistics industry is concerned - is the skyrocketing price of fuel. A report from the Organization for Economic Cooperation and Development (OECD), a Paris-based coalition of 29 countries, is cautioning that for the next year, the global economic wild card will be fuel price volatility. The group warns that higher oil prices could spark inflation.

After a wild upsurge during the last half of 2000, fuel prices stabilized somewhat by the end of last year. Oil prices had hit $35 a barrel before dropping below $30 in December. At the sametime, the price of on-highway diesel was an average $1.62 a gallon in theUnited States.

Most large motor carriers instituted fuel surcharges to offset the hike in fuel prices last year, but smaller companies are struggling to find the least-expensive supplies of diesel. In addition, the smaller carriers find it more difficult to pass along these increases to unhappy shippers.

The higher diesel prices have also hurt rail and airfreight operations. Both railroads and airlines have instituted fuel surcharges. But although the surcharges help offset the increased cost of fuel, they undermine rail and air carriers' ability to compete for a share of the less-than-truckload market.

Silver Lining

Although prospects for growth are somewhat dimmer than they have been in the past few years, there is one bright spot. It's the Internet and its continuing beneficial effect on the transportation industry. A survey of 250 U.S. businesses conducted last year by e-Commerce Business magazine showed that bricks-and-mortar companies were still bullish on e-commerce, despite the recent crash-and-burn ending for a lot of pureplay e-commerce ventures. Suppliers are discovering that the Internet generates more transactions, at lower cost.

The Internet is being credited with pushing the trend toward smaller, faster, and more-frequent shipments and with making the supply chain increasingly transparent. Industry experts say the upshot is a higher profile for transportation providers. William Michael, vice president of marketing for third-party logistics provider Menlo Logistics of Redwood City, Calif., says,"[Transportation] is now being seen as part of the supply chain and not just a function unto itself. More and more, it's being recognized that transportation efficiencies drive supply chain efficiencies." Whether those efficiencies can help guide the U.S. economy to the much-desired soft landing, of course, remains to be seen.

Carriers to proceed with caution

Not all of the obstacles facing carriers in the upcoming year are economic, of course. Several other developments have potentially serious implications for the logistics industry. Among them are the deteriorating condition of America's roadways and the prospect of expanded industry regulation.