The “fiscal cliff” crisis facing Congress is likely to be pushed off further into next year, but another recession may be looming in the not-too-distant future, warned Donald Broughton, chief market strategist, managing director and senior equity analyst for Avondale Partners at the 2012 CCJ Fall Symposium in Scottsdale, Ariz. “If current freight trends continue, it may be time to use the “R” word,” he said.
Because of improvements to supply chain management, inventory sales ratio have dropped, but the industry is seeing a small spike in inventory levels.
“We’ve had a little spike up,” he says. “The past GDP report of 2.7 percent was driven by inventories being up,” says Broughton. “We get a false positive because although inventories are up, retail sales are slower. I bet most of you that took even a nanosecond to look at that report thought it sure doesn’t feel like we had 2.7 percent growth,” he said to attendees.
Citing anemic growth in imports to ports on the West Coast, Broughton added, “I don’t think we are going to have as big a holiday shopping season as predicted.”
Broughton also predicts a record number of carrier failures when the next recession does happen. “We’ve seen failure rates drop to all-time lows, but the residual values for used trucks is down 20 percent since the peak in April. There was a graceful way for people to exit because they had equity in used trucks and trailers.
“I predict the industry as a whole has under-invested in their fleets, in the trucks and to a greater extent the trailers,” says Broughton. “As a result we are less equipped to weather the next economic downturn.”
Broughton also says the industry continues to see a shrinkage in the long haul market segment as every tick up in diesel price means a tick down in the breakeven point for intermodal.
“If you look at the conversion to intermodal, it has been successful at keeping freight they stole from you,” says Broughton. “Switching [to intermodal] has been motivated by the price in diesel, but the switching back [to over-the-road trucking] hasn’t been as fast.”