The Roemer Report December 1987

read most recent issue blue.png

The Road Ahead for Trucking Insurance

It's been just over a month since Wall Street's Black Monday. The nosedive in stock prices hit the insurance industry heavy, fostering some speculation that the property and casualty market would once again turn bearish. Now, with the benefit of more than six weeks of discussion and review, we do not see a return to hard market conditions in trucking insurance...even considering theWall Street collapse. To bespecific, we do not believe that the rate increases of 1986 will occur in 1988. In general, we see the outlook for trucking insurance in 1988 easing in terms of both coverage availability and premium increases. The nation's largest property insurance companies reported net premium volume gains of just over 9% for the first nine months of this year. That compares to a nearly 30% gain in net premium volume for the same period in 1986. These figures were reported to Business Insurance magazine. We see this as a very hefty drop off and a fairly strong indicator that a return to a hard market isn't likely in the foreseeable matter what gyrations develop on Wall Street. Given the economic turbulence of the past six weeks, we thought you'd be interested in an updated economic look at a number of key sectors. Hence, this issue focuses heavily on economic issues.

A NEW MODEL FORECONOMICCHANGE: David L. Birch proposes a new model for our economy -- that of a far-off thundercloud on an otherwise clear summer day. Writing in Inc., he suggests the economy is like a thundercloud. It appears to be changing only gradually. But inside is sheer turbulence...a mass of rapidly moving forces that are radically reshaping American companies. Birch, director of MIT's Program on Neighborhood and Regional Change, notes that these"atmospheric pressures" are causing extremely high job turnover in companies of all sizes. Dividing his cloud model into five layers based on company size, Birch reached the following conclusions: (1) The share of workers in each layer has remained nearly constant despite high turnovers. Thus, although the size of most firms has not changed significantly, the content of their work forces has. (2) Slow-growth firms account for 85% of the economy. but generate just 16%of all new jobs. Conversely, fast-growing firms represent only 7% of the economy, yet create 67% of all new jobs. (3)Small companies (with fewer than 100 employees) are creating more jobs than they are eliminating. Larger firms are breaking even or actually losing positions. (4) One in every five people leaves his/her job each year. One in ten is forced to leave. This fosters high levels of mental and economic stress.

THE BRIGHT SIDE OF "BLACK MONDAY": The stock market crash of 1987 has definitely taken the glitter off our five-year economic surge. But bothcrisis and opportunity often coexist during the same moment in time.Some positive consequences of the crash could include some of the following: (1) Wall Street's confidence crisis has put a stop to the upward drift of interest rates. Prime interest rates have decreased .75% to 1% and are settling in just below the 9% level. (2) Bond interest rates are also softening. This sharp decline in bond prices could easily spill over in mortgage rates and create a resurgence in the housing industry. (3) A rise in inflationary expectations is of prime concern to the Federal Reserve and Chairman Alan Greenspan. With inflation control apparently taking abackseat,theFedisexpectedtoshiftitsmonetarypolicyfromanti-inflationtoanti­recession.It is a move which will ease more money into circulation. This philosophical change by the Fed could well shore up today's sagging consumer confidence.

THOSE KEY BAROMETERS OF CONSUMER CONFIDENCE: The eyes of the economics community are now focused on consumer confidence -- a factor many suggest is the prime indicator of near-term economic performance. About two-thirds of the growth in GNP has been based on consumer spending in recent years. Here are some preliminary readings on the mood of consumers. (1) ConfidenceResearch.The Conference Board, a business group that monitors consumer confidence levels, announced that the index fell from 116.9 to 110.4 the week after the market plunge. This 5.6% decline is pale inseverity when compared to the 33% drop that occurred in 1973 during the OPEC oil embargo.(2) BigTicket Purchases.Consumer confidence readings in the critical housing and auto sectors are being watched closely. Car sales were surprisingly strong for the last ten days of October. Lower interest rates for mortgages are projected to help a larger number of households. About 15% to 20% of households areprojected to have lost stock wealth, but 80% to 85% of the households will benefit from lower interestrates.(3) Fallout from Wall Street's Nosedive. Recent surveys show that consumers are unsure how the 508-point market plunge will impact their jobs and financial future. What is certain is the looming bellwether Christmas shopping period -- a make or break time for many retailers -- a vote on the probable direction of our economy will be taken at the cash registers this holiday season.

THE GLOBAL PRESSURE ON AMERICA'S AUTOMOTIVE BIG THREE: The familiar competitive problems that have dogged U.S. auto manufacturers continue to plague the industry in new forms. A current worry for the Big Three manufacturers is overcapacity in their own back yard. New Asian plants now operating or soon to open in the U.S. will more than double foreign-owned production here to just under two million vehicles by 1991. All are operating in brand-new or recently refurbished plants with the latest equipment and methods. With domestic demands apparently dropping, this will put renewed pressure on U.S. manufacturers to close more of their aging. inefficient plants.Though the UAW won job-security agreements in recent contracts, market realities will shape what happens in the long run. There's also stronger production competition from Canada and Mexico, which have low production costs combined with favorable exchange rates. While Japan continues as the major exporter of subcompact cars to the U.S., Korea is coming on strong with good, low-priced cars. The Japanese are tough competitors, however, and they may offset this with a drive to develop other markets. They are moving into the U.S. market with upscale models and may export some of their U.S.-made cars to Europe. U.S. auto companies face a tough fight -- and they'll have to make some tough decisions about plants that are too old and operating at under capacity.

A MARRIAGE THAT GIVES THE TEAMSTERS MORE MUSCLE: The trucking industry has little to cheer about in the Teamsters' recent return to the AFL-CIO. The remarriage to the union that ejecteditmorethan30yearsagogivestheTeamstersmorebargainingstrengthwithoutreallychangingthe union's image. The merger has even been considered potentially harmful to the image of the parent union. It was a marriage of convenience in an era that has compelled many unions to merge as a means of survival. Employers who bargain with the Teamsters or any AFL-CIO union now face these facts: (1)There will be more cooperation among the Teamsters and other unions: this could mean more bargaining power for the unions.(2) The Teamsters will beef up the AFL-CIO's economic and political muscle. (3) With the United Mine Workers likely to return to the parent union's fold, labor will have a more united front. (4) Influenced by the AFL-CIO, the Teamsters' large PAC fund may become more devoted to antibusiness issues. It made lots of sense for the AFL-CIO to welcome the Teamsters back. Despite its poor public image, the Teamsters has maintained levels during a period that's been disastrous formats unions. With some signs indicating that the worst may be over for unions, it was a good time to begin closing ranks.

THE "SECOND JAPAN": America is experiencing a new wave of imports. This time the point of origination isn't is South Korea. Korean economic expansion is being fueled by a huge trade surplus with the United States. But the economic engine of the "second Japan" requires importing more than just raw materials. Many Korean made products have content components that are mostly Japanese. A trade triangle is developing between South Korea, U.S. and Japan. Korea manufactures products withimported parts from Japan and exports them to the U.S.As the Korean economy expands, so does itstrade surplus with the U.S. and the trade deficit with Japan.South Korea has a 7.3-billion-dollar surplus with the U.S. and a 5.4-billion-dollar deficit with Japan. Add another cliché to "Made in America, owned by Japan" and call it "Made in Japan, assembled by SouthKorea."

Subscribe to the Monthly Roemer Report

Enter Email Address Below