In President Obama’s State of the Union message that he delivered to a joint session of congress on Tuesday, January 20, he stated that the “shadow of the (economic) crisis has passed” in the United States. The very next day, the Governor of the Bank of Canada dropped interest rates by 0.25 percent “to stave off emerging risks such as weak inflation and a real-estate downturn.” The rate cut, the first by a Group of Seven country in the face of oil prices that have tumbled to about $46 (U.S.) a barrel from $110 last June, caught financial markets off guard. The Canadian dollar plummeted about 1.5 cents to close at 81.07 cents.

This raises a number of questions. First, are the economies of Canada and the United States that different? As two large trading partners that share the largest unprotected border in the world, why has the U.S. signaled that the recession has passed while Canada has highlighted its fears of falling backward into a downturn?

It is interesting that this announcement comes as the manufacturing sector in eastern Canada revs up. Anecdotal evidence from truckers (in eastern Canada) suggests that freight volumes are strong for the month of January, stronger than in prior years. Why make this move and why make it now?

There are two ways to frame the move by Steve Poloz, the Governor of the Bank of Canada. One could look at yesterday’s announcement as an act of desperation, as the sign of a country that blinked first in the face of the challenges facing the energy industry. While we have been receiving hints of increases in interest rates for some time, this action runs contrary to expectations. It may signal a worry, possibly based on early reports of layoffs and cancelled capital expenditures in the energy sector, that the Bank of Canada had to do an “about face” and take dramatic action to counter this potential threat to the economy. Of course, this also signals Canada’s overdependence on energy, that we have two many “eggs in one basket” and that our economy is nowhere near as diversified as the American economy.

Clearly the quick drop in the value of Canadian dollar is unsettling and may not instill confidence in the Canadian government, the BOC, our currency or the Canadian economy. The central bank warned that lower oil prices would take a sizable bite out of economic growth in 2015, delay a return to full capacity and hurt business investment – a trend that has already triggered layoffs and spending cuts in Alberta’s oil-and-gas industry. Canada’s two-speed economy is undergoing a major reversal of fortunes, with the once-booming energy sector fading while the manufacturing sector is rebounding, Mr. Poloz said. Economist David Madani of Capital Economics said that “clearly, [the BoC] is far more worried about a severe housing market correction.”

Thankfully, the first quarter of 2014 is behind us. The challenging winter across Canada and the northeastern USA and capacity shortages, brought on, in part by the weather, created a difficult environment for both carriers and shippers. Are we in the clear now? With the winter behind us and with the economy improving, can we expect freight supply and demand to come into balance? Here are some thoughts to ponder.

1. Climate Change will continue to produce Bad Weather

Because of its near-total dependence on petroleum fuels, the U.S. transportation sector is responsible for about a third of America’s climate-changing emissions. Globally, about 15 percent of manmade carbon dioxide comes from cars, trucks, airplanes, ships and other vehicles. A National Research Council report states that America’s transportation infrastructure is at risk due to the effects of global warming. Severe weather and rising water levels will impact roadways, railroads, and airports. Climate change will affect transportation primarily through increases in several types of weather and climate extremes. Climate warming over the next 50 to 100 years will be manifested by increases in very hot days and heat waves, increases in Arctic temperatures, rising sea levels coupled with storm surges and land subsidence, more frequent intense precipitation events, and increases in the intensity of strong hurricanes. The impacts will vary by mode of transportation and region of the country, but they will be widespread and costly in both human and economic terms and will require significant changes in the planning, design, construction, operation, and maintenance of transportation systems.

In other words, get used to it. The next winter may be worse than the last one.

2. Capacity Shortages May Increase and Get Worse

On Sunday morning, I had the pleasure of listening to a great interview conducted by Fareed Zakaria, the host of GPS (Global Public Square) on CNN.  Mr. Zakaria interviewed Sara Blakely, the youngest self-made female billionaire in the United States.  Her story is one of personal achievement and success but it is rooted in dealing with failure.

As Sara explained during her interview with Mr. Zakaria, her father would ask her a question each night at the dinner table that you don’t often hear in too many homes.  The question was “What did you fail at today?”  When asked about the biggest influence on her life, Sara mentioned her father and the power of this question.

It is important to understand that Sara started her career working at Disney World and then sold fax machines for Danka for seven years.  She tried to get into law school but she could not pass her LSAT entrance exams.

At age 27, she moved to Atlanta, and while still working at Danka, spent the next two years and her entire $5,000 in savings researching hosiery patents and visiting craft stores to find the right material for her product. Eventually coming upon a solution, she wrote her own patent from a Barnes & Noble textbook and incorporated her company under the name Spanx. Turned away by numerous mills who did not see the value of her idea, she eventually found a hosiery factory in Asheboro, North Carolina, that was willing to make her product.  She successfully pitched her idea to Neiman-Marcus by personally taking the buyer to the ladies restroom to show her the benefits of Spanx in person.  Bloomingdales, Saks, and Bergdorf Goodman soon followed.  

Spanx helps women draw the line on pantylines. The company, which also caters to men, makes footless and footed hosiery, tights, and body shapers to give wearers a slim and smooth look. Spanx now has annual sales in excess of $500 million and Sara Blakely is the sole owner.

Last week the Council of Supply Chain Management Professionals released its 24th annual State of Logistics Report. Last year, business logistics costs were once again 8.5 percent of U.S. Gross Domestic Product (GDP), the same level they hit in 2011, the new report says. That means freight logistics was growing at about the same rate as the GDP. Inventory carrying costs and transportation costs rose "quite modestly" in 2012, said the report's author Rosalyn Wilson. Year-over-year, inventory carrying costs (interest, taxes/obsolescence/depreciation/insurance, and warehousing) increased 4% y/y as inventory levels climbed to a new peak. Meanwhile, transportation costs were up 3% y/y predominantly from an increase of 2.9% in overall truck transportation costs.

This "new normal" is characterized by slow growth (GDP growth of 2.5% to 4.0%), higher unemployment, slower job creation (which will primarily be filled by part-time workers due to higher healthcare costs), increased productivity of the current workforce from investment in machinery/technology (and not human capital), and a less reliable or predictable freight service (as volumes rise but capacity does not increase fast enough to meet demand). Wilson noted that slow growth and lackluster job creation has caused the global economy to wallow in mixed levels of recovery. "This month will mark the fourth year of recovery after the Great Recession, and you're probably thinking that here has not been much to celebrate," said Wilson. "Is it time to ask, 'Is this the new normal?'"

For logisticians, the "new normal" means less predictable and less reliable freight services as volumes rise but capacity does not. In areas such as ocean transport, Wilson said, this can mean slower transit times. "I do believe the economy and logistics sector will slowly regain sustainable momentum, but that we'll still experience unevenness in growth rates," Wilson predicted.

For cutting-edge logistics managers, however, the current environment also means great opportunities to secure increasingly tight capacity in an era of shrewd rate bargaining. This is partly because the trucking industry, in particular, is facing a lid on capacity because of higher qualifications for drivers while top carriers are becoming increasingly selective in their choice of customers and in the allocation of their assets.

"Truck capacity is still walking a fine line—few shortages, but industry-high utilization rates," Wilson explained. Truckload capacity continues to remain stagnant (with the majority of new equipment orders for replacement or dedicated fleets and the copious amount of truckload capacity sapping regulations coming down the pipeline) and the assumption that freight demand will continue to modestly increase (as the economy continues to muddle along at low single digit GDP growth in combination with population growth), a less predictable and less reliable freight market is developing (as described in the "new normal").

Every year at this time, RBC Dominion Securities Inc. assembles a group of investors and invites Jim Allworth, Co-Chair and Portfolio Strategist to address the group.  This year’s session was particularly noteworthy in that Mr. Allworth painted a rather optimistic picture of the medium term prospects for the US and Canadian economies. The Saturday Globe & Mail newspaper also carried a feature article with the headline “A Recovery in Red” as did an April Time magazine feature (How ‘Made in the USA’ is Making a Comeback).  These forecasts have significant implications for freight volumes during this three year period.  Here is some of what they had to say.

The Great Recession has produced four years of below normal economic growth.  The United States, the world’s largest importer and largest economy has been growing at 2 percent per annum as compared to its normal 4 percent.  This has pulled everybody down.

Mr. Allworth cited a recent economic report of the US Congressional Office, a non-partisan group of economists, with a reliable track record, that is now predicting economic growth of 3 – 4 percent during the period 2014 to 2016.  This growth is being driven by several factors. 

The countries with low wage levels (e.g. China) boosted wages last year.  This is making the US more attractive from a cost perspective and shifting some manufacturing back to the United States. 

The process of extracting shale oil and gas through fracking is having a very positive impact on the supply of energy in the United States.  As a result of technological improvements, the US is using 2 million less barrels per day than it did a few years ago.  Through fracking, the country is producing 2.5 million barrels per day of new energy.  In total, this is a swing of 4.5 million barrels per day.  The US is expected to be energy independent within 6 to 10 years.