Economic Outlook '99: Slow growth is better than no growth
Most economists foresee slower growth for the U.S. economy this year. That should keep freight rates down, with the possible exception of LTL and ocean tariffs.
By Staff -- Logistics Management, 12/1/1998
The U.S. economy will continue to chug along this year, perhaps a bit more slowly than in past years, but still moving forward on the growth track.That's the view of most economists, who believe that the nation's unprecedented business expansion will go on, despite some worries on Wall Street. "As do the majority of
forecasters, I think we will avoid a recession in the United States," says Paul Schlesinger, a vice president with the investment banking firm Donaldson, Lufkin & Jenrette. "World trade will be slower to recover, but it will recover."
The Blue Chip Economic Indicator--a consensus forecast by 50 leading economists--projects a 2.2-percent increase for the 1999 gross domestic product (GDP), the nation's output of goods and services. "The economy has slowed down but not that much. It will be an average year," says Northwestern University professor Michael Evans, who creates business forecasts for APICS, an organization of supply chain professionals.
"On balance, more things are developing that will keep us from falling into recession," agrees Daryl Delano, director of economics for the In-Stat Group, a technology research service owned by Cahners Business Information, Logistics Magazine's parent company. Delano adds that the Federal Reserve Board's decision to cut interest rates should help keep the economy from sinking into recession.
Delano also expects inflation to remain under control, partly because manufacturers are finding raw-materials and components costs to be stable. Another signal that inflation will remain low can be found in the Producer Price Index (PPI)--the prices that manufacturers pay at the wholesale level. That index declined during most months in 1998 due in large part to lower energy prices. The Consumer Price Index (CPI)--a measure for consumer costs--also remained low this year, thanks again to declining energy prices as well as to flat food pricing. Delano expects the CPI to rise to 2.5 percent next year. (See the chart on Page 13.)
Although the drop in U.S. exports owing to Asian economic woes has hurt some sectors of American manufacturing, others continue to do well. Plants and factories across America will keep churning out goods, albeit at a slower growth rate, Delano says. He forecasts industrial production to increase only 2.8 percent in 1999, as opposed to 3.4 percent in 1998.
The U.S. economy will continue to wrestle with a trade imbalance--the gap between the value of U.S. imports and exports. "The trade deficit is big and getting bigger," Delano reports. He notes that the deficit totaled some $136.1 billion in 1997 and was expected to climb to $249 billion for 1998.
For the coming year, he foresees a $280 billion deficit in the balance of trade. "Exports will pick up in total next year," Delano says, "[but they] won't pick up as much as imports grow. The gap will continue to widen."
Here at home, inventories became somewhat bloated around the middle of this year. But some economists, including Evans, say that retailers and manufacturers worked off the excess stock in the fall. "The bulge in inventories we saw earlier this year is wiped out," says Evans. "Inventories have come down and are in line with desired levels."
Not everyone agrees that inventory levels have come down far enough. Gregory F. Burns, an analyst with the Wall Street investment firm Gerard Klauer Mattison & Co. Inc., says that inventories still are too high in comparison to consumer demand. "We may be looking at a pretty big inventory correction after Christmas," he says.
Which Way Freight Prices?
How will the softening economy affect transportation costs? Shippers can expect more of what they saw this year. Assuming that the U.S. economy sputters along--as most economists think it will--then demand for transportation services shouldn't exceed available capacity and rates shouldn't rise much.
Two possible exceptions, however, are ocean freight and less-than-truckload (LTL) trucking. In the case of ocean shipping, global trade fluctuations and federal deregulation of liner shipping make rate forecasting difficult. The Ocean Shipping Reform Act, scheduled to go into effect this spring, allows confidential contracts between carriers and shippers. The law is expected to give large shippers more clout in negotiating contracts for lower rates.
The ocean carriers themselves will continue to struggle with trade disparities on many shipping lanes, particularly between the United States and Asia. If that situation continues, importers could well pay higher rates for ocean shipments from Asia while exporters enjoy bargain fares.
As for LTL freight rates, there's some debate among the experts on which direction rates will go. Delano, for one, says shippers can expect to pay slightly higher rates for LTL transportation.
Anthony Gallo, an analyst with the investment banking firm BT Alex. Brown, thinks LTL motor carriers will have a tough time holding firm on their annual rate increases. "With diesel fuel [prices] low and a soft economy, it will be hard to convince the customer you need higher rates," he asserts.
Likewise, Robert Delaney, vice president of Cass Information Systems, agrees that national LTL truckers may not be able to secure higher rates without a strong economy to boost demand. "If [the economy] goes below 2.0-percent growth, there will be a reduction [in LTL rates]."
Rail shippers, meanwhile, can expect rates to stay firm even if the economy weakens, says Charles Banks, president of the rail transportation consulting firm R.L. Banks and Associates. "The impact of a slowdown will be most pronounced on the intermodal business, particularly because of what's happening on the Asian rim," he says.
Other types of rail freight might not see any rate reductions, says Banks, because some rail lines are near capacity already. "The railroads' ability to resist rate reductions is greater than anticipated," he contends.
Shippers of both express and standard airfreight can expect rates to stay pretty much the same in the coming year, says Ted Scherck, president of the technical research, publishing, and consulting firm The Colography Group. "With more capacity coming in than can be consumed, we see a flat yield even under the rosiest economic scenarios," he says.
In fact, the shift by many shippers toward lower-cost deferred shipments means that carriers are losing revenue on a per-pound basis. Scherck expects that this year, domestic air carriers will see a drop of 1.5 percent in revenue per pound, while international carriers will see a rise of 2.1 percent in that same category for air exports.
Finally, Scherck says, most shippers have come to the conclusion that "purchased transportation" is cheaper than carrying inventory. His prediction: "Time-definite surface systems and products will do better than time-indefinite products next year, irrespective of what happens to the economy."
There are no other articles related to this article.Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
