The U.S. economic slowdown, if not yet contraction, could not have come at a worse time for importers and carriers that feed the nation's giant consumer market, and it doesn't look like it's going to end soon. Although economists differ on the timing of the recovery, the slide in consumer confidence and the resulting slump in imports could take as long as a year to reverse.
The timing is bad because the downturn in U.S. import volumes is putting severe pressure on import rates at a time when bunker fuel prices continue to hit all-time highs. On top of that, the steady ratcheting up of gasoline prices is eating into the legendary spending habits of American consumers at a time when the decline in housing prices is emptying their home-equity piggy banks. That's taking some of the bloom off growth in China trade.
"The economy of the U.S. has entered a mild recession, and we can expect subpar growth for the next year-and-a-half," said Michael Andrews, chief economist of PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce. He expects growth in the current quarter to be mildly negative and growth through the third quarter of next year to fall below the economy's potential growth rate, which is about 2.5 percent.
Andrews said the economy is being hurt by the ongoing credit crunch, falling home prices and declining household wealth, which has severely damaged consumer confidence. "These are huge negatives," he said. Aggravating these factors are record oil prices and the sharp rise in food prices, which have cut into household purchasing power at a time when nominal income growth is falling and job losses continue.
All of these economic trends are intricately tied together in the Gordian knot that confounds shippers and carriers alike this year. "They all feed into each other," Andrews said. As import volumes decline, the carriers' outlook dims for import rate increases that might offset higher bunker prices. Andrews forecasts that total U.S. containerized imports will decline by 2.5 percent this year after falling 0.6 percent last year. He thinks imports will increase 3.3 percent next year, but said the forecast is subject to substantial downside risks.
Complicating the already complex economic picture is the fact that the euro zone economies are slowing. This could close the safety valve that has enabled carriers to deploy their burgeoning vessel capacity in the Asia-Europe trade lane, which, along with the intra-Asia trades, grew fast enough to sop up the 13.9 percent increase in new vessel capacity delivered last year.
But with Europe's growth rates starting to slow, the expected 15.4 percent increase in capacity that AXS-Alphaliner expects to be delivered this year would be more than the Asia-Europe trades can absorb, even if the intra-Asia trade continues to grow at double digits. And that could raise the specter of too much vessel capacity chasing too little cargo by next year, when capacity is forecast to increase by another 14 percent.
The success story on U.S. trade lanes has been the sharp growth in export volumes. Along with an inadvertent buildup in inventories, rising exports helped the U.S. economy stave off an outright contraction in the last quarter. The export boom has been spurred by the decline in the value of the dollar, which has made U.S. products more competitive on world markets. But as the dollar begins to stabilize and growth rates of the major U.S. export markets in western Europe and Japan begin to slow, so too will the growth rate in the U.S. export trades.
"Europe is gradually slowing and will continue, and Japan's growth is lackluster," Andrews said. "The only bright spot is in the emerging markets, but even here growth is slowing a bit, though it remains pretty solid." He said the rate of growth in U.S. containerized exports will slow to 11.5 percent this year as the global economy slows after growing 17.5 percent last year. "This is still pretty robust, but slower than last year." He said the growth in U.S. exports will slow to 9.8 percent in 2009.
Andrews predicts that the dollar will stabilize on a trade-weighted basis. It will continue to decline against the Chinese yuan and other Asian currencies, but is likely to strengthen against the euro. "It's a mixed bag. It's starting to stabilize now and will trade sideways on a trade-weighted basis," he said.
Carriers have been trying to put on a brave face about the possibility of overcapacity, saying that the additions to capacity will be absorbed by growth in the Asia-Europe and intra-Asia trades, coupled with the consolidation of their trans-Pacific services and the need to conserve fuel by slowing down their ships. But now it seems likely that Europe's growth rate is slowing faster than expected.
"We've seen signs from Europe that things are turning down a bit faster than we had forecast," said Paul Bingham, principal, global trade and transportation practice, at Global Insight, the economic consulting firm. "That's obviously a concern because if the economy turns down sharply, then the demand side of the export equation could fall off no matter how weak the dollar is."
Bingham said the growth in container ship capacity this year would not be absorbed by the Asia-Europe trade. "We had been already forecasting a slowdown in the Asia-Europe trade this year, that it couldn't sustain the growth of last year or absorb up as much capacity," he said. "There is really no substitute in terms of length of haul or ability to absorb capacity."
Global Insight is predicting that U.S. gross domestic product will decline in the second quarter as inventory accumulation turns negative. It said the stimulus payments that the government is currently sending to consumers "will kick in neither quickly enough nor strongly enough to keep second-quarter GDP growth positive." It is forecasting growth of 2 to 2.5 percent in the third quarter. But it is forecasting a 1.8 percent decline in the dollar value of U.S. import goods for all of 2008. It forecasts the dollar value of U.S. exports of goods will increase 8.6 percent.
In the face of the predicted decline in imports, some liner companies are delaying rebuilding their trans-Pacific services to the U.S. after the traditional slowdown for the winter and the Chinese New Year.
"The carriers are being very reluctant to rush back in with the full capacity this year, perhaps in an effort to support their arguments for higher bunker fuel adjustments and higher rates," Bingham said. But the pressure on the inbound freight rates is still downward. Despite the carriers' steps to manage capacity through vessel-sharing agreements, their fierce desire to compete could still create problems. "They still have a problem with too many slots chasing too little cargo as we get closer to peak season," he said.
Carriers in the trans-Atlantic trade are in a similar quandary because imports are declining. But the growth in exports in the trans-Atlantic does present an intriguing possibility, that the outbound leg could become dominant - a sharp turnaround from the situation in recent years.
"We're the closest in memory to having export volumes on the trans-Atlantic big enough to make it the head-haul as far as rate revenue potential is concerned," Bingham said. "The trans-Atlantic is probably the closest we can find to the point where carriers could treat exports as the head-haul side and the import side becomes the backhaul, so that carriers don't have to worry about rates on that leg so much. If that's possible, that may take care of some of the problems export shippers are having finding capacity for their cargo," he said.
Peter Leach can be contacted at email@example.com.
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