The general transportation sector may be better able to ride out a bear market than individual carriers

There is currently a move by some economists to tie stock market activity directly to business cycles. This phenomenon should concern you since it applies not only to the overall economy, but to publicly traded motor carriers as well.

What are the reasons behind this thinking? To begin with, economic models used for predicting consumer behavior rely primarily on income levels and historic spending patterns. The stock market comes into play because it can affect consumer spending patterns: Changes in dividends result in changes in current income; and changes in stock prices can lead to changes in wealth.

For those who rely on dividends or trading shares to maintain an income stream, variations in stock prices as well as dividends will have a direct impact on their consumption of goods and services. In general, this impact will be felt within the first two quarters of a shortfall in income.

Whether this will affect the overall demand for transportation services is uncertain. If consumers feel that the shortfall is a short-term phenomenon, they may dip into savings to maintain their current spending levels. Under this scenario, since there is no change in the level of service required, the transportation sector is not affected.

A second scenario has consumers buying less expensive substitutes. This behavior is usually short term, with consumers switching back to their more expensive choices once the income shortfall has been overcome. This is not likely to result in a change to the overall demand for transportation services, although the level of activity for particular shipper-receiverpairs will change.A third scenario occurs when consumers no longer want to dep lete their savings to maintain a particular lifestyle. They may also decide to stop buying some items altogether. In either case, the demand for goods and services declines, which in turn affects the transportation sector.

Ironically, because sellers have better control over their inventories than in the past, a decline in transportation demands will be felt more quickly. Consequently, the distribution and production chain upstream will be impacted more immediately, as will the transportation requirements related to those industries. The good news, however, is the impact will not be as severe because inventories reach minimum sustainable levels more quickly when they are near-minimal to begin with.

Since the stock market has had a rather remarkable run during the last few years, consumer reaction to recent declines will be tempered, at least initially. Spending habits are not expected to change dramatically, and the movement of goods should continue at strong levels.

The real question is whether current spending levels will merely be maintained, or will they actually grow? The latter depends on consumer willingness to increase consumption, particularly of durable goods.

Currently, consumer attitude towards the economy is generally positive. Employment levels are higher than ever and wages are increasing faster than inflation. The devaluation of Asian currencies, with a corresponding reduction in prices for the U.S. consumer, means that inflation should remain low. Finally, the Federal Reserve has remained consistent in its belief that the economy is not overheated and that a rise in the interest rates is not warranted.

It must be pointed out, however, that changes in stock prices can have a significant impact on individual carriers. Short-term variations in carrier earnings will affect equity values regardless of overall market conditions. This effect can be either magnified or dampened during the kind of market variations we have experienced this summer.

The ability of publicly traded carriers to incur expenses prudently during this market situation must be weighed against their ability to grow with the potential levels of freight at hand. If traffic levels decline and carrier earnings fall during a bear market, the financial consequences will not be pleasant for any carrier that finds itself in an expansion mode.