Monday, June 03, 2019

Auto Transport Industry and Economic Prospects 2019 through 2020

As business owners, we spend most of our time trying to pull the levers available to us: controlling expenses, planning for future needs, improving quality of service. While we do this work, we're glancing at the horizon to keep an eye on the industry as well as economic conditions in general.

I've got to say in 15 years of being in business, I've never seen an industry and an economy so hard to predict. I'll outline a few ideas here

First, the good news: Unemployment is at record lows.

The official rate is 3.8%. Even the broader U6 measure which includes discouraged workers and people working part-time for economic reasons is down to 7.3%

As my grandfather used to say: “Everybody that wants to work is already working.”

More good news: Productivity is rising.

More people are working, and those people are earning their employers more money. Gross Domestic Productivity, the total number of dollars paid for all goods and services in the economy has been going up relative to the number of employees working. In the broadest sense, increasing productivity means the workers of an economy are working harder, faster, smarter, and creating more innovation. That's good for business owners, workers, and customers. (I like to think of business as a stool with three legs-- if the business is run in such a way that the needs of the owners, the workers, and the customers are taken care of, then that business is probably going to be stable. If one of the legs is short-changed, then the whole thing is going to be wobbly.)

Increasing productivity coupled with low unemployment is the best recipe I know to decrease income inequality. Put another way: an economy that produces jobs is going to help raise people's standard of living faster than any government program.

The (sort of) bad news: We are now in a trade-war on multiple fronts, so prices will go up as businesses pass on the cost of the 25% tariffs they're paying. (to get some deals on pre trade-war straps, click here.)

People can argue back and forth about how we got into this situation, and whether it is for a good cause or not. The fact of the matter is: we're in it now. Material costs are rising, and they're rising not only for straight up imported products, but they're rising for stuff made in the USA, because lots of products made in the USA have some imported products as components.

The really bad news: This could slow down sales of big-ticket items like cars and trucks, or even trigger the start of a full-on recession.

With the current trade war with China and the ones threatened with Mexico and Europe, the entire logistics ecosystem is being upended. Whether this conflict is resolved in a way that is favorable remains to be seen. In the meantime, the tariffs act as a sudden tax jolt, as costs paid by importers are passed on to distributors and ultimately consumers. With the complex logistics of auto manufacturing, this could result in price increases for vehicles that will start slowing down sales. That's bad news for car haulers and people like me that want to sell stuff to car haulers.

More bad news: Federal deficits are skyrocketing, with US spending expected to exceed income by over 1 Trillion dollars just for 2019 alone! This is on top of the mountain of debt the US created in the aftermath of the mortgage meltdown and Great Recession of 2008.

Most of this current deficit (not to be confused with the aggregate US debt, which has risen over multiple decades) came about as a result of the Tax Cuts and Jobs Act of 2017.

Normally, a tax cut would be a go-to option for the government to try and stimulate an economy that is already mired in a deep recession. It has never been done when an economy is operating at full capacity with full employment. So we are in uncharted waters here.

Some economists are beginning to question whether such mountains of debt even matter. Other, more traditional economists say that it does indeed matter, because if there is ever more debt than there is appetite to purchase it, then the yields offered on all that debt must rise until buyers are found. Not a big deal if yield on the 10 year US Bond is 2.2%, but what if it goes back up to 15.5% where it was back in 1980. The amount of debt we're getting ourselves into could be similar to the trap some families get into when they use too much credit on one of those 6 month 0% interest rate cards that snaps back to 24% compound interest in the 7th month. By the time the interest rates change, it's too late to take the stuff back to the store. Now imagine that times trillions of dollars.

Worse news: Since we've already used the stimulus of tax cuts during the boom times and piled onto our already huge mountain of debt, it will be politically and economically difficult to do future tax cuts in the next recession. Also, if Congress decides to play a game of chicken with the debt ceiling limit, credit ratings agencies like Moody's could downgrade US debt issues, resulting in higher yields being demanded at auction. Also: China, with whom we're currently in the middle of a trade war, has historically been the biggest foreign buyer of US debt. It is doubtful they would weaponize this debt by selling off their $1.12 Trillion in debt, because this would drive the US dollar down in value, which they definitely don't want to do right now. But sometimes people don't act in their short-term interest if they have a longer term goal or a point to prove.

My conclusion is that as business-owners, we have no choice but to make hay while the sun shines. We don't get to decide what the government does or doesn't do. We can only pull the levers we have in front of us. Right now, economic conditions in this country are doing exceptionally well.