RECESSION?:Traffic numbers wobbly

The numbers don’t show anything dramatic happening yet and are probably consistent with (1) just a pause from economic growth, or with (2) the first stages of a more serious and prolonged economic downturn, a recession. Traffic numbers tend overall to be about the same now as a year ago. It’s a no-growth picture, so far.

Individual months have some random factors, such as weather, affecting them so we went for the latest three months: November and December 2000 and January 2001 and the corresponding months a year earlier.

Used to 2 to 3%

Toll agencies which have been used to 2 or 3% annual growth during the 1990s now have little or none. That’s the essence of what the statistics report.

The New Jersey Turnpike didn’t have Jan numbers when we asked but total traffic Nov & Dec was 35,926k vs 35,861k a year back, a 0.2% increase. The increase is almost entirely in trucks 4,455k vs 4,410k, a 1% rise. Car traffic was flat at 31.5m. Of course there was a toll increase in Sept, approx 15%, so given that, the NJ pike stats are quite robust.

The Pennsylvania Turnpike’s January numbers for passenger vehicles are not yet complete because of difficulty integrating new E-ZPass transactions data with cash toll data. For the moment they have two entirely different computer systems. November and December passenger vehicle numbers were 19,760k vs 19,522k, a 1.2% rise. Commercial vehicles don’t yet have E-ZPass so their numbers are complete through Jan: 4,412k vs 4,411k, a wash. No growth.

Continuing west into Ohio we were only able to get aggregate transactions, trucks and cars combined. The months bump around, one higher, the next lower. Overall Nov-Jan vs a year ago is 9,952k vs 10,131k last year, a decline of 1.8%.

Now the faxes and emails back from our kind tollsters take us into the truckiest of all: the Indiana Toll Road (ITR). Some system changes have delayed the January numbers but Nov & Dec combined and this time we get veh-miles traveled (VMT): commercial VMT are 72,207k vs 75,734k a year ago, a nasty 4.7% decline. Mike Puro the director of the toll road says that Dec 99 numbers may have been boosted a bit by Y2K scares and that could account for some of the decline. In IN passenger traffic has been as strong as truck traffic was weak compared to a year earlier for a 4.6% rise. So overall VMT on the ITR is 181.2m vs 180m, a 0.7% rise.

Puro says that in bad winter weather passenger car trips are often cancelled or postponed whereas trucks are quite likely to increase their toll trips – coming off the parallel free state routes which may not be as well plowed as the toll road. He says the trucks that run on the toll roads won a lot of traffic from railroads because of merger problems a couple of years back. Rail may be getting their act together now and regaining some market share. But he agrees that the impact of fuel prices and a recession may be at work as well.

Now into Illinois. Somehow they could get us Jan 2001 but couldn’t retrieve Jan 2000 numbers – a Y2K bug? – so we summed Novs and Decs: 116.5m vs 118.9m total transactions, a 2% decline, the clearest recessionary indicator of the five. That’s made up of a quite large decline in truck traffic down from 10.9m in the recent bimonthly period vs 11.7m a year earlier, a 6.8% drop. Car traffic is down too, 105.6m vs 107.2m, a 1.5% drop. LATE NOTE: Got Jan 00 #s for ISTHA. They look better, especially cars. They are below Jan 01, so that for the three months Nov-Jan is 0.9% ahead this year compared to last. Truck traffic however continues below year-ago levels in the Chicago area with ISTHA trucks 5,406k this year vs 5,532k last year. For the three months combined we’re at 16,298k trucks vs 17,223k last year, a 5.4% decline. (We’re using the term ‘trucks’ loosely for what the tollsters call commercial vehicles.) Overall traffic is virtually at year-ago levels in the latest three months: 174,917k vs 174,482k, a 0.2% increase.

Hiccups

Some will argue these are just hiccups. And these data could be consistent with that. It is possible the worst is over, as optimists suggest. But the data are also consistent with the beginning of a recession and a year or so when the trend of traffic is down but with jagged graphs of activity that differ a bit from area to area.

The Dow is only down about 15% from its high in early 2000 while Nasdaq has lost almost two-thirds of its value. It’s an uneven stock market drop, but then they always are. The bottomline is that a lot of people are now a lot less rich than they were at the very beginning of the millennium! Consumer spending, housing starts and business investment are all affected. Then there are the trickledown or multiplier effects that take time to work themselves through the economy. Fortunately savings get drawn upon and take some of the brunt and limit the size of the multiplier. Government taxcuts and lower interest rate policies can also act as a cushion.

David Hale an analyst with the Zurich group in Chicago says bluntly the economy is now in “free fall.” Venture capital funding he says will be cut in half this year, the junk bond market is providing no more credit, and the banks have gone very cautious about small business lending. Hale thinks a recovery beginning in 2002 is quite achievable so long as the federal government can get its act together on tax cuts. That’s quite a big ‘so long as...’

Dimwit Davis

Another source of worry is the bizarre behavior of the government of the largest state, California, which surely has the most cretinous man to find his way into a governor’s mansion in recent history! Gov Gray Davis was faced this winter by a long predicted electricity shortage that could quite properly have been blamed on his predecessors. They were the ones who stood by, idle and mute, allowing NIMBY and environmentalist groups to block construction of new power plants while the economy boomed, and with it demand for power, annually reducing the margins of reserve capacity. They were also the ones who came up with a gimcrack scheme for allowing market forces to operate at the wholesale level while putting a regulatory cap on consumer rates.

Gray could quite legitimately have roasted the Wilson administration that preceded him for the electricity mess they left behind. And he had perfect political cover for letting electric power rates rise to market levels by suspending the perverse consumer rate caps. It was indeed his predecessors’ fault that the state was in this predicament.

Instead this governor vilified interstate power producers as ‘pirates’ and suchlike, while saying he wants these same pirates to invest in new power plants in his state. And he continues his predecessors’ freeze on consumer electric charges – a sure way to deter that investment in new capacity while also discouraging conservation of energy!

This is called shooting yourself in both feet.

Davis also seems intent on bailing out the electric utilities that richly deserve bankruptcy for colluding with the previous Wilson administration in the cap on consumer electric rates while agreeing to divest themselves of their power plants to buy their power in an unstable daily spot market – a sure strategy for financial disaster if ever there was one. Davis wants to keep these near-bankrupt fools in business while vilifying the independent power producers, the very companies that have the resources to help the state out of its troubles by building new capacity.

These largely inherited problems are now being compounded by Davis’ entanging state agencies in buying an electric power transmission system and in borrowing billions to subsidize consumers by having a state agency buy electric power from those awful ‘pirates’ at several times what consumers are billed. It is all so profoundly, so inanely stupid, one worries what other idiocies this dimwit governor will inflict upon California, and how much damage he will do to the economy of the largest state of the union before someone with a brain manages to stop him.

Misallocation of resources on this scale has the potential to set back productivity, lower living standards and severely disrupt capital markets. The US has had counties and cities go broke, but Davis seems on track to have a state default.

Some don’t see recession

Some we spoke to, aren’t even seeing a recession. For example, the North Texas Tollway Authority’s finance chief Susan Buse told us she sees no recession in their traffic: “The malls are still full, and as long as that’s the case, we’ll keep seeing the traffic.”

It will vary from area to area.

Trucking is sometimes regarded as a leading economic indicator because of inventory effects. Growing inventories can lead to orders and then shipments being reduced more drastically than sales, so you can sometimes see trucking effects more starkly. However to the extent the new information technologies allow companies to avoid inventory runups – all that just-in-time delivery stuff – you won’t see such an exaggerated one-time effect on trucking. Just a steadier erosion along with sales if indeed they are in decline.

Passenger car trips on the commuter pikes are probably going to track the local economy – especially employment. Some travel is a luxury or luxury-associated such as that associated with swank vacations, new housing, and consumer durables, and gets cut back in hard times. Sport and entertainment travel is in a similar category. Commuting is of course work-related so tends to track jobs. It is locally determined. The longer distance pikes (NJ, IN, OK etc) will probably track the broader regional and national economy, though many toll agencies these days serve a local and also a more broadly based customer base.

Different from other bubbles?

The WALL STREET JOURNAL (3/2/01 pC1) noted some similarities between the dotcom bubble and other bubbles in history. The 17th and 18th century saw a number of booms and busts. The Dutch had a tulip frenzy. And there was a great boom and bust on the London stock exchange, associated with hype about foreign trade possibilities in the era of sail ship exploration. The South Sea Company equipped with a royal monopoly in trade with the Spanish empire saw its shares rocket up and crash. Foreign trade did produce 19th century British economic ascendancy, but it was far from a smooth ride.

In the 1820s and 1830s there was great excitement about the implications of the steam locomotive, but a crash in rail-related stocks in 1837 that took a decade to work off.

In 1921 there was a auto industry bubble that burst. The preceding decade had seen vastly exaggerated expectations about the returns to be had from auto companies. GM stock soared 55-fold in price 1914 to 1920, then lost 2/3rds its value in 6 months in 1921. William Durant its founder and largest shareholder was ruined. Many car companies went under and GM took 6 years to recover its market cap, even though car sales increased, and even though GM was better managed than most car companies.

Airline bubble

In 1927 after Charles Lindbergh flew the Atlantic and investors saw the potential of airtravel, there was an airline stock bubble followed by a burst.

Radio was also a hot area for investment in the 1920s and the Intel of that period was RCA. However its stock collapsed in 1929, and the company never really recovered. Many 1960s hot stocks had the suffix ‘-tron’ or ‘-tronics’ and were creations of the first big electronics craze. As in previous cases the companies made major contributions to the advance of technology, but failed all the same, because they couldn’t make a viable business out of their activity.

A Morgan Stanley guy is credited with the phrase “technology hype cycle” to describe the frenzy of venture capital and excessive expectations about the profitability of new technology for its pioneers. This is followed by investor disillusionment but also a period of slower more deliberate efforts to find profitable uses for the technology that were overlooked or mismanaged in the frenzy phase of the cycle. It is then often in a second stage that the new technology is more productively applied and viable businesses grow successfully, while some of the wild pioneers – the ‘bubble companies’ – have fallen by the wayside.

The visionaries and inventors are usually lousy managers, and corporate governance is rarely able to successfully transfer power smoothly from the celebrity entrepreneurs to capable managers.

The internet boom has now broken and fundamental economics suggests that the excesses of this prolonged boom will take some time, and some serious corporate restructuring and capital writedowns to be worked out.

Capitalism’s big advantage over socialism is its ability to punish and put out of business those who fail to serve realworld consumer needs, and who misdeploy investor funds by misjudging consumer willingness to pay relative to cost – those who have mismanaged their labor and capital. Socialism keeps these failures on the public payroll by granting them monopolies, bailing them out with subsidies from profits made elsewhere, or with taxes, and otherwise mollycoddles them. It prevents the correction working itself through. Capitalism needs to have a recession every now and then to do its cleanup work of getting resources out of unproductive ventures. The greater the excesses and the longer the preceding boom the more necessary and inevitable is the recession.

Robert Samuelson, the WASHINGTON POST economist, says (2/22/01 pA19) the internet may one day develop into a great advance for mankind but for now it is “unproductive, costly and wasteful.” That’s perhaps a viewpoint on the skeptical extreme, but the benefits of the internet are very uneven. It is an amazing technology for giving away information, for lowcost communication. It is highly productive for mass marketing and order taking, but not yet much good for directly delivering a product for a paying price. For that large part of the economy – entertainment and many other kinds of actual service delivery (including music, video and publishing) for a price – the internet is all hype so far. The very ease with which a customer can reproduce the electronic product deters its creation and its use for a paid product. [To state a close-to-home case: if someone wants to pirate this newsletter doing it with a photocopier is a lot of tedious work, mailing and postage, whereas if I put it out as a pdf file, someone could send it to all my customers for free as an attachment to an email, with just a few clicks on the keyboard. So I’d be crazy to do pdf.]

Real business needs to recover average costs, while most internet stuff is being priced at marginal cost, which is little or nothing. The revenue the internet generates is therefore pitifully small relative to its costs. It only makes sense for virtual giveaways such as brochures. It is therefore of great value in some parts of the economy (government, education, not-for-profits) and of little value in other parts.

New business models are tough to develop. The pioneer of the supposed new form of internet finance CyberCash of Reston VA, a mid-90s high flyer that some predicted would sweep Visa and American Express away just filed for Ch 11. Another case of a business based on low marginal cost finding its way to the economic graveyard. Someone will hit on the right formula some time perhaps, but many will try and fail beforehand.

Tollsters, of all people, understand the pitfalls of marginal cost pricing since a road often (out of peak) has very low marginal cost to cater for an extra vehicle. In the case of a light vehicle the marginal cost of the off-peak trip is often close to zero. But to keep an enterprise afloat it’s a positive bottomline of average and total revenue minus average and total cost that is needed. The internet is a dangerous economic quagmire of hype and marginal cost pricing. The awakening to this will be painful for many.

Recession’s implications

If indeed there is a serious recession there will be pluses and minuses for the toll business.

Minuses will be (1) difficulty maintaining financial viability especially for those with debt structure based on expectations of growth in traffic (2) customer and political resistance to toll increases (3) greater difficulty raising capital, especially if some pikes default on bonds (4) the pain of managing a contraction of costs including cutting staff...

Pluses may include (1) less difficulty hiring and holding staff (2) more competitive bidding for services and construction (3) a rising level of service on the roadways from better volume/capacity ratios (4) some weakening of environmentalism, that product of plenty, and more active hip-pocket nerves in the electorate (5) reduced tax collections and greater need for fee-for-service such as tolling.

HISTORY: Vollmer right, belatedly

Gerald Neilsten of Vollmer Assoc told the IBTTA annual conference in Rome in Sept 1996 that the US economy was headed for a recession. He cited a dip in truck traffic on major pikes as a leading indicator for the US economy. We called it “airhead forecasting” then (TRnl#9 Nov 96 p2), and so it was. A small dip downward was being projected ad absurdum.

Most likely cause of that false call was that around that time trucking lost a bit of mode share to rail in the east coast to Chicago routes. This was a small once-&-for-all gain in mode share by rail following more competitive service with new double-high freight trains being accommodated on recently heightened lines through PA and MI. But the pikes soon got their market share back, and trucking and the US economy boomed for three more years.

But, they say, if you wait long enough almost any forecast will work out. And the famous fall-96 Neilsten forecast may now, about four years later, be fulfilled?