Recession Should Begin to Ease Midyear Followed by Mild Growth, Economist Says
This story appears in the Feb. 23 print edition of Transport Topics.
ORLANDO, Fla. — The recession under way for 14 months is already “deep and long” and is supposed to hit bottom around the middle of this year, with mild growth in the second half, a Federal Reserve senior economist told a heavy-duty industry gathering here Feb. 16.
William Strauss of the Fed’s Chicago regional bank said the consensus among economists is to forecast strong expansion taking hold in 2010.
Corporate executives speaking at the Heavy Duty Dialogue and Aftermarket Week agreed on bleak descriptions of the present.
The annual gathering is sponsored by the Heavy Duty Manufacturers Association, Research Triangle Park, N.C.
However, Strauss and another economist offered solace in the notion that current problems, while setting a record for the worst economic downturn since the end of World War II, are nowhere near as severe as the Great Depression.
“Sometime this year, the decline in housing should finally hit bottom,” Strauss said. “Our labor productivity growth is still solid, and we should note that since World War II, 86% of the months have been in growth.”
Strauss said the consensus of “Blue Chip” forecasts is for a 5% contraction, on an annualized basis, in U.S. gross domestic product during the 2009 first quarter, worse than the 3.8% annualized contraction in the 2008 fourth quarter.
The economy’s contraction should ease to 1.5% during the second quarter before turning positive in the third quarter, he said, making for a recession of 18 or 19 months.
Strauss said the unemployment rate was likely to peak around 8.8%, an increase over January’s 7.6% rate but below the 10.8% peak of the 1982 recession.
The 1930s Depression was in “a whole different league,” Strauss said, with unemployment hitting 25% and the GDP decline 26% below the 1929 peak. Current GDP is about 3.1% below the peak of late 2007, he said.
Robert Dieli, a private-sector economist in Lombard, Ill., said his models show the economy should return to notable growth by the fourth quarter of this year, possibly earlier. He said the new federal stimulus plan could begin altering employment levels by May or June.
An official of one major truck maker said the difference between the present and the 2001 recession is the credit market.
“The difference . . . is the liquidity crisis. Customers are having a difficult time making the decision to purchase a truck,” said Thomas Plimpton, vice chairman of Paccar Inc., parent company of Kenworth Trucks and Peterbilt Motors.
Plimpton said Paccar’s in-house financial arm normally finances about 25% of Paccar’s truck sales, but that might have to increase because the willingness of bankers to lend is “hard to predict.”
Plimpton said used truck prices dropped by 10% in the fourth quarter.
While Plimpton said the drought in truck sales has helped Paccar’s aftermarket parts sales, Stu MacKay, president of MacKay & Co., a trucking consultant also in Lombard, Ill., said the economy has led fleets to cannibalize some idled trucks.
Dave Fulghum, MacKay & Co. vice president, said utilization rates are down because of the drop in tonnage, correlating with fewer miles driven. At the same time, he said, trucks and truck parts are higher quality, allowing extended maintenance intervals.
MacKay and Fulghum, who survey more than 300 truck fleets every quarter, said many maintenance managers are pulling parts off idled trucks and using them instead of buying new parts.
As a result, MacKay and Fulghum estimate the U.S. aftermarket parts business declined by 4% in 2008 from 2007 and will slide another 0.4% this year.
“Don’t expect the economy to help you in 2009,” Fulghum told the parts distributors in the audience.
The aftermarket business should grow in the long-term, though: MacKay estimated the truck parts business at $15.6 billion last year and said he expected it would grow to $20.3 billion by 2015.
MacKay also said fleets would prefer doing less maintenance if they could find someone else willing to do it well and at a good price. He said fleets do about 75% of their work in-house but would like to pare that down to 65%.