Labbe Forecasts Moderate Growth

July 1, 1998
Slowly rising inflation and a continued tight labor market are among the economic factors that are expected to impact the US tank truck industry within

Slowly rising inflation and a continued tight labor market are among the economic factors that are expected to impact the US tank truck industry within the year, said Martin Labbe, president of Martin Labbe Associates. The result could be modest profit gains and slightly reduced productivity, neither of which pose severe threats to companies for the near future.

"A few more good years are ahead of us," said Labbe. He made the predictions as part of an annual economic report and forecast at the National Tank Truck Carriers meeting May 18-20 in Washington, DC.

On the other hand, should interest rates creep up, the higher cost of borrowing money will cause an increase in operating expenses and postponement of business expansion. "Business investment to increase productivity is growing, but that may diminish," he said.

At the same time, the tight labor market is complicated by a lack of corporate loyalty from workers, specifically drivers who move from company to company. However, many drivers who remain with companies are more flexible, dependable, and agreeable workers, which offsets some of the difficulty in hiring and retaining employees, he said.

Labbe also discussed statistics regarding activity in the tank truck carrier industry. Profit margins in 1997 averaged 3%, down from a 3.25% average in 1996. The average operating ratio in 1997 was 95%, up a few points from the previous year.

Operating costs are predicted to be 2.7% of revenue in 1998 and 2.9% of revenue in 1999. The increase is based, among other things, on rising fuel costs, accelerated charges for employee health benefits, and higher prices for equipment and office operations.

Labbe said the industry can expect government to issue more regulations that will require costly compliance, especially regarding the hours-of-service issue.

He predicted a strong summer demand for petroleum products, specifically those used in the road surfacing sector.

Housing starts are likely to decline, but cement is likely to be in demand for non-residential construction and road resurfacing.

Food products are expected to suffer a short-term weakness.

Markets for rubber and plastic products may be soft because of a drop in domestic automotive-related production. Vehicles imported from Japan and other Far East countries are less expensive for the American consumer because of a favorable exchange rate. Foreign car sales have been boosted as a result, he said. In addition, chemicals imported from Pacific Rim countries that are used in the auto industry are expected to decline because of the economic pressures there. However, the flat US vehicle sales reduce demand for the imported products.

The cost of importing basic chemicals is expected to go down, which would benefit US production.

Looking further down the road, tank truck industry belt-tightening may come from over-expansion by shippers that trickles down in the form of lower shipping rates. Additionally, he warned against short-term planning by some large public companies, including carriers, which leads to expansion that exceeds return-on-investment. A similar condition is currently occurring in booming real estate construction. Labbe expects a downturn in that arena which could impact the economy.

The continuing rail crisis is expected to keep the industry unsettled as shippers and carriers try to work out logistics and rates. Even when the railroads recover, they will face litigation filed by disgruntled shippers that could cost billions of dollars. "That will be hard for the railroads to absorb," he said.

A strong US economy, including the healthy stock market, bodes well for business. "The United States is a safe haven," he said. "The problems are offshore." Long-term international events that may eventually impact the nation's economy, and subsequently the tank truck industry, involve the unification of western Europe, which is in the experimental phase; on-going economic difficulty in the Pacific Rim countries; and continued financial instability in Russia. International financial upheavals can drive US interest rates up and play havoc with international trade.

On the foreign trade front, exports to Asia are expected to weaken further, but exports among the North American Free Trade Agreement (NAFTA) countries will help to offset the Asian situation.

In the household sector, real wage gains will provide for sustained consumption, but high debt-to-income ratios would make consumers vulnerable to rising interest rates, a situation Labbe termed "very troublesome."

Even though the economy remains stable and the short-term outlook is promising, the forecasts of slightly rising interest rates and a tight labor market should prompt tank truck carriers to continue operating as efficiently as possible while keeping capital investment under control.