Rate hike to raise costs for truck fleets

money

Rising interest rates, impact on borrowing and consumer spending among unknown factors

The Federal Reserve voted to increase its key interest rate today, upping the rate 0.25% to a target of 1% to 1.5%. It is currently at 0.91%.

The 0.25% increase is an indication the Fed sees the economy on solid footing, even if some indicators of late might suggest otherwise. Wages are not rising as fast of expected and inflation is going down, dropping to 1.5% in recent months, below the Fed’s 2% target. On the flip side, low unemployment – at 4.3% it is at the lowest level in 16 years - is an indication the economy is improving, and the Fed has lowered its outlook for unemployment for 2017, expecting a 4.3% rate at the end of the year versus 4.5%. It did, though, increase its anticipated GDP growth for 2017, moving a 2.2% forecast, up from 2.1% in March.

While a 0.25% hike does not seem significant, it could have a detrimental effect on consumer spending if the Fed is wrong about the improving economy. And that could have a significant effect on freight flows.

“The increase was small, which will likely not have large noticeable impacts on the industry,” says John Engstrom, equity research associated at Stifel. “This is indicative of the Fed’s internal belief that the economy is improving despite inflation now stepping up.”

When the Fed increased the rate one-quarter point in December, financial firm TransUnion found that 8.6 million consumers could not afford the hit they took in rate increases on everything from auto loans, to credit cards, to mortgages. That occurred, the firm said, even though the average impact was just $18 per month.

The low rate over the last several years has resulted in millions of consumers benefitting, TransUnion says. Consumers now hold $3.8 trillion in debt, the firm reports – up 31% over the past 5 years. More than a quarter of that debt – just over $1 trillion – is considered revolving debt whose rates are typically based on the prime rate. Any move in that rate, such as this 0.25% increase, immediately impacts that debt.

WalletHub notes that consumers are expected to pay $6 billion more in credit card interest payments this year due to the last three rate hikes.

The same holds true for trucking companies looking to purchase equipment, refinance debt, or who may have lines of credit or loans that feature variable rates based on the prime rate. Although a quarter-point increase may not be a significant amount - a quarter point increase translates to $2.50 more for every $1,000 borrowed - experts suggest watching for future increases that compound the impact.

For example, a consumer who purchases a $35,000 new car with a 60-month loan would pay an average of $4 more per month, the Motley Fool explains, or $236 more in interest over the life of the loan. Not a lot, but the Fed keeps raising the rates (it raised the rate 0.25% in March), in a year or two, that $4 a month could quickly become $20 per month.



For a trucking fleet who may borrow millions of dollars to purchase hundreds of trucks, these increases could add up quickly. Those carriers who carry fluctuating interest rate loans may be hit immediately, but all will certainly see higher rates for borrowing.

“The most significant impacts from increasing rates are seen by carriers on the cost of debt or operating leases, and by shippers in the cost of inventory,” explains Engstrom. “The former makes asset ownership more expensive while the latter requires a more fluid and faster moving supply chain to manage the total costs associated with serving customers as shippers will seek to maintain less inventory on hand to manage working capital costs.”

The Fed said to expect another 0.25% increase later this year and three increases in 2018. That would mean a 1.5% to 2% increase over the past two years if all four increases are implemented.

The hike could, in theory, actually make it easier for carriers to get access to capital.

"Even though interest rates have gone up modestly since last fall this may actually stimulate lending because bank spreads have been so narrow that it has been a bit of a deterrent to lending," says Thomas Albrecht, president of Sword and Sea Transport Advisors. "As rates and spreads renormalize, lending activity including for trucking should pick up next year."

“Rising interest rates increase the cost of capital, which can slow consumption, manufacturing and production,” reports PNC. “With only a quarter of a percent hike, the immediate impact on investment for manufacturing and production is likely to be minimal.”

For consumers, it could mean a pullback on spending which could dent freight levels as the year rolls on.

“As far as consumers are concerned, this will increase the cost of borrowing, so hopefully the Fed’s belief that a rate increase will be offset by increased economic activity will come to fruition and not decelerate our rate of growth,” Engstrom says.

“By any historical standard, interest rates are still very low,” adds John Larkin, managing director - transportation and logistics, for Stifel Equity Research. “The danger is that the Fed over-corrects and the higher rates stifel borrowing, investment, and consumer purchasing of house, autos, and other capital goods. On a positive note, higher interest rates are welcomed by retirees and others that rely on interest income to live. Higher interest rates will eventually translate into more consumer spending on the part of this group."

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Brian Straight

Brian Straight has covered the U.S. trucking and transportation community for more than 10 years, winning numerous regional and national editorial awards, including a Jesse. H. Neal Award. Prior to working on FreightWaves, Brian spent 10 years at industry trade magazine Fleet Owner, and prior to that managed daily newspaper editorial operations.