Economic Outlook for 2013

  • Economic Outlook for 2013

    At the edge of the fiscal cliff.The Q4 results of 2011 were surprisingly good, and the results couldn’t have come at a better time, boosting confidence going into 2012.

    But then — The Euro crisis deepened, truck sales dropped, and foreign markets sagged. The U.S. election fostered uncertainty; and The States’ growth was slower than expected. All of it ­contributed to a year of uncertainty.

    So here we stand, at the very edge of the calendar year. Will 2013 be as unlucky as it sounds? For this, our annual economic look ­forward, Today’s Trucking perceived a few key rays of sunshine, piercing the fiscal fog.

    Volumes and Fiscal Cliffs 

    Volumes are typically a function of the larger economy. “Our economists, as they usually do, are looking at a lot of moving parts,” says Walter Spracklin, managing director with RBC Capital Markets’ Transportation Sector.

    “What we’ve seen is a significant weakness coming out of the foreign markets, particularly out of Europe and we’ve seen some slower growth coming out of the U.S. Canada has done notably better in recent quarters in coming out of the recession and as a result has come out a little better. But we can’t ignore factors like the fiscal cliff and any potential policy changes that might come out of the election.”

    Emanuella Enenajor, economist with CIBC, agrees. During the Ontario Trucking Association’s (OTA) Annual Conference in November, Enenajor explained that the U.S. recovery is still significantly supported by the government.

    “A couple of years back, when we were all talking about the recovery, we were discussing this public-to-private handoff; the fact that the government and all this spending and all that support would eventually be withdrawn and there would be a handoff of growth to the private sector. We’re simply not there. Four years after the recession we’re simply not there. So while we are seeing growth around one and two percent in the U.S. — which is paltry at best — even that growth is significantly supported by government support for the economy.”

    She explained it like a patient in a hospital who is hooked up to an IV drip and being sustained by it. “The issue is, if you pull that IV drip off, you can potentially railroad any further recovery. And when people discuss the fiscal cliff, the fact that government spending, stimulus spending, is set to come offline next year, it would pull that spending out of the U.S. economy—that’s roughly four percent of the U.S. economy — that’s huge and could potentially plunge the U.S. into another recession.”

    Bottom line? The politicians have to decide how much of that spending they’re going to pull back on. Enenajor and CIBC are predicting that there will be some extension of stimulus in the U.S., but spending will be backed off by about two percent.

    “That’s going to hold growth in the U.S. to around two percent, but it won’t be the full whammy that everyone is scared of, and we’re likely to see that fiscal cliff get whittled down to a fiscal molehill and spread out over the next couple of years.”
    Slow recovery, in other words Spracklin agrees: “If the U.S. can get through this period of fiscal challenges and not be thrown back into a recession, then Canada should do fairly well. So when I look at volume, I’m thinking this year might be zero to two percent, so flat to modest growth is what I’m looking for in the trucking sector.”

    Provinces in the Backseat

    The economy in central Canada — and this shouldn’t come as a surprise — is being “characterized as sluggish by
    my companies,” says Spracklin, who watches TransForce, Contrans, TriMac and Mullen.

    “We’re not looking for any significant ramp in growth, in volume next year out of what is typically the engines of the national economy.” The same goes for Atlantic Canada, Spracklin says. Western Canada looks to be in the driver’s seat for some time.

    Pricing is Anybody’s Guess

    “There’s no magic formula here,” he says.

    When there’s too much capacity in the market, pricing tends to go down and when times are good and capacity is utilized, that tends to fuel pricing increases. “Unfortunately it doesn’t last forever in the trucking industry with it being very low-barrier to entry compared to railroads, when pricing becomes very attractive or returns start to spike, you do see new entrants enter into the picture and that tends to flush itself out fairly quickly.”

    Pricing has been holding fairly steady, if slightly down, since falling off during the recession, Spracklin explains. “We’re forecasting flat for this year in most ­segments—maybe one percent at best.
    “We do believe that we’re going to have a good pricing environment eventually in the trucking segment, but it’s anybody’s guess as to when it unfolds.”

    Signs of Life

    “Housing is really what got us into this mess in the first place,” Enenajor told the OTA audience, “ but what we’re starting to see is home building gradually tick up in the U.S. Initially, it was just apartment buildings because people were getting kicked out of their homes due to foreclosures. But now we’re seeing single detached homes being built in the U.S. and it’s been a long time coming.”

    And after years of pent-up demand for autos, people are now coming back to the market. “The average age of vehicles in the U.S. is around 11 years for passenger cars and people were pushing it to the limits even though they needed to buy new cars,” Enenajor explained. “We’re seeing an increase in car sales, in credit driven sales. And that’s really critical to the underlying consumer psyche.”

    Those two sectors alone point to a gradual U.S. recovery, Enenajor said. And while we’re not seeing broad-based recovery in all segments, those two are critical for 2014 and 2015. “We really do have the ingredients for a much more entrenched recovery in the U.S.”

    Canadian exports, however, have been down, and only time will tell how that plays out, with much of that having to do with foreign markets.

    But the economists aren’t too worried about those markets, including China which, Enenajor said, is likely going to accelerate next year. “While we’ve seen a slow down in commodities this year with China, we’re expecting a pick-up in late 2013.”

    Asked about foreign markets, Spracklin said that Canadian “exporters are doing very well by tapping into China, the Middle East, Latin America, Brazil and so on, so that when one falls away another takes its place.”

    He’s not ringing any alarm bells when it comes to foreign markets or Europe, and neither is anybody else, for that matter. “But it would certainly be good for everyone to have them back up on their feet.”

    And hopefully that’s where your business will be come 2014.


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