Monday, October 30, 2017

Super Gridlock is Super Good for Business

A panelist at the recent FTR (Freight Transportation Research) Transportation Conference reminded us that businesses like it when the government stays out of “their business.” He said companies were benefiting from the new “hands off” environment. He claimed this had improved business confidence, and, more importantly, business performance.

We have seen these conditions before, usually when power in Washington has been divided between the political parties, creating gridlock. Often this results in the government not being able to accomplish much, a “libertarian paradise.” Libertarians would argue that government actions to spur economic growth are often wasteful and ineffective. They also claim regulations, even for noble purposes, are often poorly designed and lead to harmful unintended consequences.

Our current jumbled, toxic, political environment, while harmful in many areas, has created a favorable business climate. This is beyond gridlock, this is super gridlock. Instead of two factions fighting for power, you have three. This is an economic and not political discussion, so I will not get into the motives of the Democrats and the divided Republicans.  

However, if companies love gridlock, they are absolutely giddy about super gridlock. Businesses prefer conditions that are stable and favorable and a government which does nothing to impede growth. And now the government is actually doing less than nothing.

There have been over 800 regulations cut or delayed in the first six months of the new administration. Furthermore, there has been a crimp placed on any new regulations. From a purely economic perspective, this is creating an extremely favorable business environment. It appears now that it is the government being regulated and not businesses.

Soon after the election, business confidence indexes spiked. At the time it was uncertain if this renewal of hope would have any positive outcome on the economy. Would survey results in December eventually turn into dollars? For a while, it looked doubtful, even as the survey numbers remained high. Now it would appear that we have the answer. Yes, the increase in business confidence is beginning to have a positive impact. We just had to wait; Tom Petty was correct, “The waiting is the hardest part.”

At FTR we constantly talk to manufacturers about business conditions, because manufacturing is so tightly connected to freight. Several producers from different industries said they noticed a definite upturn in business in June. A speaker at a recent forum I attended said his bank had noticed a recent surge in small business investment. Anecdotal information is always difficult to process, but now it looks like these statements were valid.

The ISM Manufacturing Index rose to 60.8 in September, the best reading since May 2004. Let this sink in for just a moment. The index says that U.S. manufacturing conditions are at the most positive level in 13 years. In addition, the ISM Services Index is at a 12-year high. My contact in the precision machined products industry says that business spiked near a record high in June, fell some in July, but recovered in August.

Some analysts are saying the hurricanes boosted the September ISM manufacturing number, so watch the October reading carefully. However, the inventory reading of the ISM was low. This means sales are running ahead of production, so production needs to increase. The hurricanes should not have a substantial hit on GDP, the experts say only 30 to 50 basis points in the short-term, with a boost later. The Wall Street Journal economists survey is forecasting GDP growth of 2.7% and 2.5% for Q3 and Q4, respectively. Add the 50 basis points back to Q3, and you get 3.2% GDP. (Now the first GDP estimate is 3.0%, then add .5 and you get 3.5% without hurricanes!) Not too shabby.

Oddly, the biggest hindrance to future growth is lack of workers. The official unemployment rate is down to 4.2%, and large numbers of people are out of the workforce due to opioid abuse, lack of technical skills, and disdain of manual labor. The trucking industry will face this challenge in a few months as more drivers will be needed to haul the growing demand for freight. This, and reduced productivity due to ELDs (Electronic Log Devices), could stress trucking capacity to the max.

The economy has increasing momentum entering 2018. If Congress is able to pass tax reform, it will give business another huge boost. However, don’t get too exuberant just yet, not with super gridlock still in place.

Monday, September 11, 2017

Living in Boomtown?

Things appear to be booming:

-          3% GDP growth in Q2. The word on the street turned out to be more reliable than the economists’ forecasts.

-          Unemployment rate of 4.4%. Economists set “full economic employment” at 4%, because it is estimated that at any time 4% of the labor force is in some form of transition. Unemployment at 4.4% indicates there are jobs available for anyone who wants them. However, this is more complicated in the current job market. There are jobs available which people don’t want either because the wages are insufficient, the safety-net is too safe, they do not prefer manual labor, or the jobs don’t match up to their college degree. There are also open jobs which require a level of technical skill lacking in the available labor pool.

-          Consumer confidence spiked in August to the second highest level since 2000. The job market is growing, home prices are rising, and the stock market is booming. Times may not be as good as 2000, but it’s much better than 2009.

-          Consumers are opening their wallets. Retail sales were up 0.6% in July, and the consumption numbers in the last GDP report were strong. West Coast port activity is up over 10% this year.

-          Manufacturing is also steady, with the August PMI index hitting an impressive 58.8%.

-          Miles driven increased 1.2% y/y in June and 2.2% in May. More people are driving to work and more people are going places, both signs of increased economic activity.

-          Truck freight is sturdy. The FTR forecast is for 3.4% growth for 2017, including an impressive 4.2% y/y growth in Q4.

-          New Class 8 truck and commercial trailer demand are flashing strong positive signs now, and healthy demand is forecasted to continue into next year.

And looking outside my window:

-          Help wanted signs are popping up everywhere. There are two adjacent restaurants with banners near the street competing for workers. There are radio ads for skilled factory workers and truck drivers.

-          The new office complex near my house finally has some tenants. There still are not many cars in the parking lot, but it appears three out of five offices are occupied.

-          The “economic warzone,” which I have previously written about, is not fully recovered, but I now doubt that it ever will be. The abandoned buildings are too old, and new construction provides more attractive options for new businesses. However, traffic through this area has greatly increased.

-          Likewise, traffic on the local highways seems much heavier than a few years ago.

Yes, it looks like boomtown! But how long will this last?

-          The optimist says this is the surge we have been waiting on for eight years. There is renewed confidence, a more business-friendly administration and tremendous pent-up demand. This is the start of something big!

-          The pessimist says this looks a lot like the top of an economic cycle. Everything appears great right before the slide begins. This recovery has lasted much longer than expected, and we are due for a drawback. Things look good now, but you never see it coming.

-          The Wall Street Journal Economists Survey Panel expects growth to fall back to around 2.5% for the next several quarters – but you expected that, right? It is higher than the 2.2% the economy had been stuck at previously. Only 21% of the economists forecast growth at 3% or more in Q3 (before Harvey and Irma). The FTR GDP forecast is close to 3%.

The Call

In this mixed-up economic environment, it is unusually difficult to forecast. That’s why the economists have resorted to predicting “more of the same” for a while. You can’t fault them since most of the forecasts have been good.

When it’s this murky, I tend to be biased towards the transportation markets because they have been reliable economic indicators. These markets say there are more blue skies ahead. Of course, there were blue skies in Florida just last week. You never see it coming ……

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Wednesday, July 12, 2017

Is Manufacturing Ready to Accelerate?

Earlier this year, there was a surge in business confidence in the manufacturing sector of the economy. There were forecasts and predictions of robust growth. However, at mid-year, there is limited evidence of a manufacturing revival and most economists are not factoring a big change into their Q3 and Q4 GDP forecasts. So, what is happening, or more importantly, what is going to happen in the manufacturing sector?

View from The Trucking Industry

Big data collected from indicates spot market (bid freight) is smoking hot. This indicates freight demand is better than the industry expected. The FTR freight forecast shows sturdy freight growth the second half of the year. Orders for Class 8 trucks are up 38% YTD over last year, and the commercial trailer market continues to exceed expectations. These factors would point to improved manufacturing activity which could begin to accelerate soon.

Manufacturing PMI

The June manufacturing PMI (Institute for Supply Management) rose 2.9 percentage points from May to 57.8%. This is the highest reading since August 2014, which, coincidently, just preceded the huge Class 8 truck build in 2015.
The New Orders and Production indexes are upbeat and increasing. Backlogs and Exports are also growing. Inventories are at normal levels and would appear to be a non-factor. The PMI has averaged 56.4 (readings above 50 indicate growth) in 2017.

This index would indicate vigorous manufacturing activity. However, this is a survey and maybe some of the high business optimism is creating a small halo effect here. Also, FTR has identified a lag time of a few months between the index readings and the actual results. This could indicate the manufacturing sector has spent the first six months of the year recovering and retooling for bigger and better results in the second half of the year.

Manufacturing Employment

The May numbers show only 50 basis points of increase versus a year ago. Manufacturing employment has been flat for the last 2.5 years, that’s why it was an election issue. It appears there was enough slack in the system to absorb an increase in output so far this year. Workers are being more productive - it’s the impact of automation. If manufacturing is accelerating, it is not showing up in the employment numbers yet.

Manufacturing Production Data

This measurement increased 1.4% in May, the seventh straight increase. The trend is positive; the pace is moderate. Capacity Utilization is 76.6, slightly down from April. April’s reading was the best since late 2015. This would indicate growth is sturdy.


Exports are up 7.5% YTD. The Commerce Department just reported exports at a two-year-high. A solid performance, and before any trade deals have been renegotiated.

The Fed Manufacturing Indexes

Philly Index – Down 11 points from May, but still positive.

N.Y. Index – Up 21 points to the highest level in more than two years

Dallas Index – Down 11 points from May, but still positive

Richmond Index – Up 6 points in June, but had been much higher earlier in the year.

The indexes are not consistent in direction, but they are all in positive territory. As a group, they are not as strong as a few months ago.


Durable Goods Orders (ex-transportation) up 0.1%. Factory Orders down 0.8%, the second straight decrease in orders. Does this mean manufacturing is losing momentum, or could the big orders have been placed in prior months and ordering activity is taking a respite?


Inventories are down slightly in the latest report, but are at reasonable levels. The inventory/sales ratio is at 1.37 and looks to be in balance. This shouldn’t have a drag on manufacturing activity.    
These gears need to move!

GDP Forecasts

The Wall Street Journal Economic Forecasting Survey has GDP at 2.6% in Q3 and 2.5% in Q4, slightly better than the 2.2% standard of recent years. So, most economists do not expect a manufacturing surge the second half of the year. The highest estimate in the survey is 4.1% in Q3 and 4.2% in Q4, no doubt this economist has been talking to some manufacturing people.


It isn’t surprising that the numbers in manufacturing are not consistent and do not point to firm direction. The economic indicators in general have been very hazy the past year. This is an economy of fits and starts, of mild acceleration followed by the tapping of the brakes.

It is clear manufacturing is growing, so we have a direction. The numbers continue to point to stronger, faster growth. The table has been set. The orders have been placed, the machines have been oiled, some regulations have been lifted, and the factories have started to hum. Manufacturing people continue to be upbeat and optimistic, but are they too optimistic? When does confidence turn into currency? When will we see the boost in manufacturing activity show up in the general economic data?

How much manufacturing growth will there be in the next 12 months? Will it continue the uneven path of the past six months, or will it bust out into a sharper upward track? When I don’t know the answer, I like to split the difference. Let’s expect manufacturing to strengthen, but not accelerate. We can use GDP for Q3 and Q4 as a guidepost. At 3% growth = moderate manufacturing growth. Greater than 3% = robust manufacturing growth. At 2.6% or under = not much change in manufacturing output.

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Tuesday, June 13, 2017

Step Right Up and Pick Your Favorite Economic Indicator

Pick an indicator, any indicator…

Flatbed Freight

I recently attended a conference for flatbed fleets owners. These small business owners are extremely bullish on flatbed freight in the second half of the year. Their rosy business outlook mirrors some of the small business confidence surveys that have been reported.

This is significant, because flatbed trailers haul a wide variety of industrial freight from numerous industries. If flatbed freight is strong, then manufacturing and the industrial sectors should be robust as well.

The sentiment from the fleet people is consistent with the FTR forecast which has freight loading increasing over 5% year-over-year in the second half of the year, with flatbed loadings up over 9%. If you choose flatbed freight as your key indicator, the economy is looking robust in the second-half of the year.

The Employment Numbers

Normally, a 4.3% unemployment rate would indicate a vibrant labor market. If you ask someone looking for a professional or living wage job, however, you will probably hear the market is not as good as it seems. Sure, the job market continues to crank out “barista-type” positions at a healthy clip, but that is not what is needed to boost this economy.

The Labor Department just reported that job listings reached an all-time high; however, actual hiring is down about one-third from a year ago. This would indicate structural unemployment (where workers lack the skills for available jobs) is unexpectedly getting worse.

The official unemployment rate is significantly impacted by a low labor participation rate. Aging demographics aside, many potential workers can’t pass a drug test, and the expansion of the safety net during the recession has created disincentives to working. Ask any HR person at a growing company, and they will tell how difficult it is to find new workers.

Yes, there are a decent number of hires reported every month, but wages are not rising fast enough to make a difference, and job growth is still not sufficient to replace jobs lost during the recession. If you select employment as your indicator, you expect just more of the same.

Stocks and Bonds

The stock market is booming, reaching record highs, and some analysts are trumpeting great upside potential. The bond market, however, is flashing yellow, if not red, signaling a slowdown in the economy. So, if you use stocks as a predictor, things are going to boom. If you choose bonds, look out for a bust.

Confidence Surveys

The Business Roundtable said its survey of executive economic outlook hits its highest level in three years. The executives are anticipating new legislation to boost business. If you chose this indicator, it’s boom time for the economy.
However, POTUS approval ratings are in the cellar, raising doubts that anything gets accomplished. If you go with this stat, then the economy gets worse.

Banks Loans

Total bank loans have peaked and have started to fall. The last three times this occurred, recessions followed. If this is your indicator, put your money into gold and run for the hills.

The Forward-Looking Indicators

A few months ago, I predicted stronger growth for the economy this year. This was based on these indicators showing marked improvement. However, the current numbers, while still positive, have slipped a bit. What looked like a trend now appears to be just a normal, moderate upcycle. The type we’ve seen repeatedly in this recovery. These indicators would suggest a strong Q2 and Q3, with a falloff in Q4.

The Economists

The Wall Street Journal economist survey has Q2 GDP at 3.1% (range from 1.6 to 4.0%), Q3 at 2.6%, and Q4 at 2.5%. GDP for 2017 is 2.3%. This makes sense; if there is no clear direction, you must forecast more of the same. 


Pick an indicator, any indicator. Uncertainty still rules as there is no clear direction. In the end, though, it appears we are going to continue to go nowhere slowly.

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, May 15, 2017

Who Let the Economic Dogs Out?

The Great Recession was devastating to the U.S. economy. At its worst point, 9 million people were unemployed and the average household income fell more than 8%. In addition, the U.S. government took drastic action to prevent the financial system from collapsing.

The people hurt the most by this recession were the risk-takers. There were many of these, because money was cheap and the economy was hot. Of course, we remember the “bad” risk takers: the house flippers; the guy who built a big hotel on a street already lined with hotels. However, there were also many “legitimate” risk takers: the service company that bought new equipment and vehicles to expand its business; the manufacturing company that built a new plant because of higher sales.

Unfortunately, the recession did not discriminate. If you had taken on too much risk at the wrong time, you might be finished. My friend, Steve, left his corporate job in the early oughts (00) to become a consultant, the risk being giving up a steady paycheck for potential greater reward. He worked hard and, over several years, had built a successful enterprise. I admired his entrepreneurship, risk-taking, and results. Then the Great Recession hit and virtually dried up almost all of his revenue.

After “average” recessions, businesses would soon begin spending and hiring again, albeit at a reduced rate. Consumers would promptly resume consuming. This would create a snapback in GDP, and we would be on our merry way until the next downturn. However, after the Great Recession this did not happen, and there never was a snapback. Everyone was afraid that the financial system could fail and make things even worse. A spirit of economic cautiousness permeated our culture, both for businesses and consumers. People saw what had happened to the risk takers and became very risk averse.

People did not buy lots of new homes. People did not buy many new cars. People drove their old cars fewer miles (it took five years to get back to the pre-recession miles-driven high). Businesses did not hire people back. It takes more employees to build up sales than it takes to maintain sales. If a company is content with its sales volume, it does not need to hire additional workers. If a company has a growth strategy, then it needs more people, but this would involve taking risks. Most importantly, people did not start many new businesses, because that is one of the biggest risks you can take. Since successful new companies are a reliable source of new jobs, this also hindered employment growth.

Under more normal conditions, Steve’s customers would have started issuing contracts again. However, the services he provides are in some way related to taking normal business risks, so his clients didn’t  return even though the recession was over. Steve took a teaching job to get a steady, but much lower, paycheck. He still consults, but that income is a small fraction of what it once was, even after eight years!

The risk aversion has become part of our culture. When companies see other companies or competitors take risks, they are much more likely to take risks. Millennials witnessing the economic destruction of the Great Recession don’t want mortgages or even car payments, knowing that if financial disaster hits, they just need shelter and food to survive. The 2012 presidential election is a notable example. Even though economic growth was sluggish, voters overwhelmingly chose the status-quo over the “risky” candidate who might make disastrous changes.

All this risk aversion had a deleterious impact on the economy. We know now, due to the great benefit of hindsight, there was too much caution. The financial system did not collapse and we did not slide back into recession, or worse. If people had actually taken normal risks, the economy would have recovered faster and stronger. If the economy had grown just 50 basis points more each year from 2010 to 2016, imagine how much better things would be right now.

There were signs that risk aversion was fading in 2016: more business startups, more job growth, more houses built. Yet, this still did not lead to a higher GDP. The economy seemed destined to remain in an endless stupor, until an unexpected event suddenly created unbridled optimism, signaling it was time to the resume “normal” business activity and take some risks. If someone was just watching the confidence survey results in a vacuum, they would ask: Who let the dogs out? Who? Who? Of course, we know the answer is President Trump, however remember this was a political, not an economic,
How far will these puppies run?

Now the dogs are running around and barking enthusiastically, but are they going anywhere? My good friend, Miles, says the animal spirits of the economy have been released. He reports that the Precision Machine Products Association (PMPA) Sales Sentiment Indicator, “exploded up 40% from December’s already optimistic number.” This index is significant, because these parts go into a wide variety of manufactured products. A manufacturing executive said, in a recent nationally televised town hall, “There is optimism and excitement (in corporate America), more so than ever before.”

Now the big question: How much of this optimism will actually turn into profit. Where is the action? Where are the tangible gains? Well, I don’t have information on the entire economy, but I do have clear insight into the transportation equipment market. There has been a sizable increase in orders since the election. The truck and trailer manufacturers increased production significantly in March, and Class 8 truck OEMs are expected to continue to increase production throughout the year.

There is still reason for some caution, however, in that many of the orders placed are for delivery in the second half of the year. Fleets are showing strong confidence in the future sales, which is consistent with all the sentiment surveys. However, this also is a positive sign for the general economy, since commercial equipment is a solid economic indicator (you need to have more equipment ready to haul the increased freight generated by a growing economy). More truck and trailer orders would point to a strong economy later this year.

If being cautious knocked 50 basis points off GDP, what does this burst of optimism add? Does it just turn that around, adding 50 points? Does it cancel that out and add the same amount back on, a 100-point increase? Most economists don’t expect this confidence and risk-taking to have much of an impact this year. It is difficult to adjust a forecast based on those darn animal spirits. I made that mistake in a previous post, believing that the optimism would significantly impact Q1 GDP, which limped in at a meager 0.7%. Q2 is forecasted to be much better, however. It will be interesting to see how fast those economic dogs are running in the second half of the year. 

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Thursday, April 13, 2017

Holding Five Wild Cards and Not Knowing What’s Trump

Everything Changes

The election of Donald Trump as POTUS brought a pronounced shift in strategy, tactics and actions regarding the U.S. economy.  It’s almost as if President Trump is CEO of U.S.A. Corp and is managing the entire economy as a business entity.  This has never been tried before and therefore the degree of economic uncertainty has greatly increased.

Current Situation
-         Truck and trailer orders dipped before the election due to increased uncertainty about the outcome.  This is common and the economy usually also slows down due to the same phenomenon. Smaller fleets and small businesses get particularly cautious.  After the election fleets started ordering again, in volumes much higher than expected. Orders usually increase in October and stay elevated until December, as fleets place their requirements for the coming year. In 2016, orders for trucks and trailers did not spike until November (a direct result of the election), however orders have remained strong through March.

-         The economic indicators are improving, including the key, forward-looking ones. It is important to note, so far this is the result of an economy on a natural upcycle and not the result of President Trump’s policies, which have not been implemented yet.  Therefore, you should ignore the political rhetoric on this, both positive and negative, for a while). The economy is forecast to grow at a 2.4% clip for the first-half of the year, with potential upside based on the status of these positive indicators. Based on the delivery dates of the orders, trucking fleets are expecting a stronger freight market in the second half of this year.  

-         There is renewed economic confidence because, although the economy slumped some (1.6% GDP) in 2016, it did not go into recession and looks poised to resume growth. The monthly Class 8 truck build declined 54% from June 2015 to December 2016. Drops that steep almost always are connected to recessions, but not this time. Truck build has increased the last two months, and the jump in orders means the worst is over.

-         Consumer and business confidence is soaring. Consumer confidence is at a 16-year high and small-business optimism at a 13-year high. The Obama administration was viewed largely as pro-regulation and anti-business by many companies. With a business magnate like Trump in charge, businesses are expecting positive changes. Consumers are feeling better because the election is over, the job market is improving, and the economy is doing better than in 2016.

The Future Could Be Good

-         Some onerous regulations are being eliminated or delayed.  Trucking was a favorite regulation target of the previous administration. It is expected that most pending, non-safety related regulations will either be delayed, changed, or eliminated. In addition, future greenhouse gas standards on trucks and trailers could be modified.  Less regulation could lead to greater economic growth in the general economy.

-         Tax reform could help small businesses, including many trucking fleets, that believe they are over-taxed.  If fleets have more money to invest, this will help equipment sales and other sectors of the industry.
-         Increased infrastructure spending helps trucking and the economy. The investment in roads and bridges will increase freight and improve truck traffic flow.

-         Trucking is now viewed as a “favored” industry. It often appeared the previous administration viewed trucks as something that polluted the air and endangered the highways. On March 23, the president of the American Trucking Association, ten leading industry executives, and twelve truck drivers were Trump’s guests at The White House. They discussed issues affecting trucking. They also brought along a high-tech truck/trailer combination in which the President was photographed sitting in the driver’s seat. This would indicate there will be a much friendlier business climate for the industry.

The Future Could Be Bad

-         NAFTA renegotiations could create problems.  For the most part, NAFTA logistics has worked well for the benefit of the three countries involved. The optimal logistics routes and systems have been established and utilized. Some products cross borders multiple times before sale. Changes to this system, and unforeseen consequences, could disrupt supply chains and cause major issues and problems for the transportation industry.

-         Trade agreements will be renegotiated with China and other countries creating the potential for multiple trade conflicts, and even trade wars, if negotiations turn sour. This would have a deleterious impact on the economy, exports, and freight.

-         Interest rates will probably keep rising. Interest rates were kept artificially low for many years after the Great Recession. Now rates are gradually being increased. At some point this will discourage borrowing and put a crimp in economic growth.

-         There is a great deal of uncertainty about the entire Trump presidency. There are master plans to bring manufacturing jobs back to America. There is a new strategy to deal with conflicts around the world. There is a new immigration policy. There is still a looming healthcare crisis to deal with.  Missteps in any one of these areas could lead to an economic downturn.

What About the Economy?

-         The economy was improving before Trump took office, so he is not responsible for what happens in Q1, and he probably won’t have much impact on Q2. So please ignore the press reports which over-dramatize this.    Likewise, the impact of a “Trump Bump” on the U.S. Stock Market is also exaggerated. However, there is some positive impact to increasing consumer and business confidence on an economy already gaining steam, similar to giving a push to an object already in motion.

-         Most economists don’t expect the economy to grow more than 2.5% in 2017. There is some upside potential if the confidence numbers turn into actual dollars spent. Most of Trump’s plans for job growth and reforms will take time to implement, meaning the impact would be in 2018 or later. 

Other Industries Beyond Trucking

The transportation industry is not unique and is tied to almost all sectors of the economy is some way, so I would conclude that many factors impacting trucking and impacting other industries as well.  The expectation of less regulations, lower taxes and a better business environment is boosting business confidence.  However, this confidence is in future conditions, therefore the orders and investments placed today will need to yield rewards at some point.

Freight Forecast

FTR is forecasting Class 8 truck freight to grow by 2.9% in 2017. This is a healthy increase over the 1.3% growth rate for 2016. The freight forecast is consistent with the economic outlook above assuming the manufacturing sector continues to strengthen.

Equipment Forecast

A moderately growing economy, generating modest freight growth, will support a basic replacement demand of trucks. Class 8 truck builds are forecast to increase 1.6% in 2017. Dry Van trailers had a robust year in 2016, as fleets are still replacing old trailers whose trade cycles were extended due to limited use during the Great Recession. Trailers production is expected to decrease around 7% in 2017, but still be historically strong. The mandate to use Electronic Logging Devices (ELD) which automatically record driver hours, is expected to decrease truck productivity and increase demand for new trucks (and some trailers) at the end of 2017 and into 2018. If this impact kicks in earlier than expected, 2017 demand will be higher.

Too Many Wild Cards

The biggest impact of the Trump presidency right now is a pronounced increase in uncertainty. It’s like playing a whole new card game for the first time and being dealt five wildcards. There are so many new factors in play which could have a significant impact (either way) on the economy and freight
markets. If all of Trump’s economic plans work brilliantly, the economy would grow at rates not seen in years. Conversely, if Trump makes some big mistakes, the negative economic impact could be severe. Therefore, this is now an environment with a much higher upside and much deeper downside than before the election.

Monday, March 20, 2017

Is the Gopher Moving From Caution to Confidence?

Economic calamities result in changes in micro-economic behavior which can last for years. My grandfather had accounts at eight different banks, just in case seven of the banks failed; my grandmother dutifully recycled her aluminum foil, 25 years after the Great Depression had ended. People fear that bad times might return, which causes them to be cautious for an extended time.

Likewise, the Great Recession (of course not nearly as traumatic as the Depression) ended only eight years ago and continues to impact micro-economic behavior and thus, macroeconomic performance. Exacerbating this impact was the weak, inconsistent recovery which followed.

Businesses and consumers emerged from our recent calamity exhibiting significant caution. Businesses witnessed customers and competitors getting washed away in the economic tumult. Almost everyone knew someone who had suffered a significant economic loss during this time. In recent, milder recessions the economy snapped back, and this short-term caution was replaced by renewed confidence, and economic behavior quickly reverted to pre-recession norms.

However, that has not happened, as of yet, this time. When you add in the cultural changes taking place due to the Millennials and new government policies over the last several years, the economic behavior changes are significant.

I initially resisted the idea of a “new normal” when this was suggested by some economists a few years ago. I argued that it was more like a “new abnormal,” which suggested that we would divert back to the “old normal” at some point. However, this transitional period has lasted too long, and too many factors have appeared for economic society to ever return to conditions of the mid-oughts.

This recovery period has been characterized by over-cautiousness and under-confidence. It is the Gopher Economy, with businesses and consumers sticking their heads up to move forward, then diving back under the ground at the first
sign of economic distress.

The high cautiousness combined with cultural and governmental factors have resulted in the following changes:

-         Home ownership percentages remain lower. It is much less risky to own a home than to rent. The recovery has not produced enough high paying jobs. Add in student loan debt, and Millennials cannot afford houses, are not getting married, not producing children, etc. These factors are muffling the housing recovery, which is usually a main driver of economic recovery.

-         Labor participation rates are down. The top end of the demographic scale got hit with huge layoffs during the recession. Older, displaced workers don’t have enough time to learn new skills, and they are much less likely to move to where new jobs are available. Some workers entered expanded disability programs, and some retired prematurely. On the other end, many Millennials have entered the workforce at a much lower level than expected, because the recovery has not produced ample opportunities. The government has expanded the “safety net,” which decreases incentive to work. In addition, some younger workers eschew manual labor positions, making it difficult for some manufacturers to fill open jobs. Not having these older and younger people in the workforce also hinders economic growth.

-         Millennials are less likely to own cars. Car loans equal debt risk, and caution works against this. High student loan debt and lower paying jobs limit the funds available for transportation. Uber and ride-services limit the need. The DOT Miles Driven measurement lagged for an extended period during the recovery, finally resuming a more normal growth rate in 2014.

-         Unemployed workers are much less motivated to move cross country to take jobs, because of the risk that the new job may also end. Cautious workers stay put. However, many Millennials are moving into the downtowns of large cities and saving money by sharing living expenses and reducing transportation costs. Now some jobs are being moved into the cities to attract these workers, so you actually have some jobs following the people, instead of the other way around.

-         Small businesses have been very reluctant to spend money on expansion or new equipment. The slow recovery and increased regulations have held profits modest. The inconsistency of the recovery has kept business owners cautious.

-         Banks have been more cautious in making loans. Requirements have tightened.

-         This economy lacks risk takers, entrepreneurs, new business start-ups, and new industries…the types of companies which create jobs.

Impact on the Transportation Equipment Markets

The biggest impact of the Gopher Economy has been on medium-duty work trucks, the types of vehicles used by many small service and construction businesses to transport their equipment, materials, and supplies. The market has grown modestly during the recovery, but much less than Class 8 trucks and trailers. Small businesses continue to manage their companies cautiously, avoiding risk, just in case the recession returns.

In December, I wrote about the boost in consumer and business confidence since the election. Many economists warned, at the time, that this was more of an emotional reaction and this confidence would soon fade; however, the opposite has occurred:

-         The Conference Board Consumer Confidence Index is up another 7.7 points since November.

-         The University of Michigan Index of Consumer Sentiment gained another 5.6 points from November.

-         The Gallup U.S. Economic Confidence Index jumps to +16, 8 points higher than November.

-         The National Federation of Independent Business is up 7.3 points since November, its highest level since 2004.

However, confidence surveys are traditionally unreliable predictors of future action (i.e. actually spending money). Still, the large increases in these indexes are hard to ignore. They would indicate the economy could be moving from caution to confidence, and this has very positive indications for future economic growth.

It took a world war to shock the economy out of its stupor after the Great Depression. Did it take a landmark election to shake the ground and cause this economy to emerge from its hole and start moving again?

  This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)