Friday, April 17, 2015

Did the Economy Just Literally Run Out Of Gas?

The Federal Reserve of Atlanta made big news last week when it announced it lowered its forecast for Q1 GDP growth to 0%. Yeah, that’s zip, zero, nada, nothing!

Most economists had downgraded their forecasts, but this announcement still was a surprise. Commentators quickly blamed bad weather as the reason. As I have mentioned before, this year’s weather was extreme, but it did not disrupt manufacturing nearly as much as last year’s Polar Vortex.

There were piles of snow in the Northeast, but that would impact the service industries more than manufacturing. However, the ISM Non-manufacturing Index was at 56.5 before the bad weather and 56.5 after (with little variation in between), so the service sector couldn’t have been hit too hard.

The other factor in Q1 is the West Coast Port Strike. The strike was settled in February, but it caused finished product and component product disruptions before then and will continue to create issues through May. The impact is difficult to measure. Some plants did shut down for a couple days due to lack of parts. However, most manufacturers found ways to work around this issue, albeit at higher costs. So again, there is an impact, but not a significant one.

Economists who believe the weather and port problems are the reason for a weak Q1 predict a “snap back” in Q2. But the data doesn’t support this yet. The ISM manufacturing index for March was 51.5%, actually down from 52.9% in February. The Wall Street Journal Economic Survey Panel (March) is forecasting 3.0% for Q2, an improvement back to previous expectations but certainly not a snap back.

Let’s assume that the Wall Street Journal Panel Q1 forecast of 2.3% took into account the weather impact. We will subtract another 80 basis points due to the port strike. That gets us to 1.5% growth. If we assume the Atlanta FED forecast is correct, what caused the 1.5% to evaporate?
What has changed recently? What significant economic occurrence? What, what, what? Oh yes, crude oil prices, and thus gasoline prices, have plummeted.

But wasn’t that supposed to be a boon to the economy as an estimated $70-$100 billion dollars poured into consumer spending as disposable income grew? Except it hasn’t happened. Consumers are not spending the extra “gas savings” cash as freely as they did in the past. Why? What is different this time?

The Great Recession changed many things, including consumers’ attitudes. One week your job was going great, you were making good money, and running a big credit card balance. The next week you were unemployed, with no hope of finding a job quickly, and no chance of paying off your debts for a long time. After the Great Recession, people are more conservative with purchasing decisions and, this time, are not spending the gas savings windfall.

Of course when crude prices fell, economists warned that the economy would also take a hit due to reduced oil and gas exploration infrastructure and drilling. This part of the equation has come true, although actual production remains fairly steady.

Conventional wisdom would say that the energy industry is a small segment of the total economy and a slowdown in activity should have a limited impact. But what if the conventional wisdom is wrong? At times during this long recovery we have heard “the energy sector is the only area of high growth.” We have seen better job growth numbers, followed with the caveat of “most of these jobs are low-wage positions in the service sector, except for all the higher paying jobs in energy.” Perhaps it was the energy sector and the ancillary spending, jobs, and positive news that was driving the modest economic growth for the past few years. And now, there was an unexpected shock to this growth machine that is letting the air out of the growth balloon.


Remember that economists were confused by having a recovery which wasn’t led by housing; so what then was leading it, beyond energy? Also, we do know what happened when the economy, being led by a housing surge, albeit artificially generated, crashed due to an unexpected shock to that industry.

I’m going to predict that the energy slowdown is having a much bigger impact than anticipated. It is probably not responsible for the entire 1.5% drop mentioned previously; the stronger U.S. dollar is hurting exports, so this causes part of the drag.

How viable is the Atlanta FED 0% Q1 GDP forecast? The lowest forecast in the March WSJ poll was 1%. However, that forecast is from Brian Wesbury and Robert Stein from First Trust Advisors, L.P. And these guys are good. They write the First Trust Economics Blog – The Antidote to Conventional Wisdom, so naturally they are two of my favorite economists. And it looks like they were way ahead of the game on this one.

It would appear the engine of economic growth has literally run out of gas. Regardless of what caused the slowdown, the momentum has been lost. Unfortunately, it appears it will be much harder to regain traction this time.

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


Friday, April 3, 2015

Freight Markets Are Good - But Not Great

At FTR (Freight Transportation Research), we are literally “all about the freight,” no kidding. We believe understanding the freight market is the key to understanding trucking, railroad, intermodal, and, ultimately, the economy.

So we are very concerned that the February Industrial Production numbers showed manufacturing output dipped 0.2%, down three months in a row. In addition, the January and December numbers were adjusted downward.

Is there a problem lurking here? Every month the experts at FTR dive deep into the freight data to understand where we are and where we are going. It is a finger-on-the pulse and ear-to-the-ground type of analysis.

What is the Current Freight Situation?

Sectors Doing Well:

·       Food – more jobs equate to more consumption and more people eating out

·       Fabricated Metals – auto industry is expected to have another good year

·       Stone, Clay and Glass – non-residential construction is on the upswing

Sectors Showing Weakness:

·       Chemicals – not sure why yet, but trend is not good

·       Metal Mining/Primary Metals – commodity prices much weaker

·       Lumber and Wood – not horrible, but housing starts still slow

·       Petroleum – due to the drop in crude prices, but not as bad as expected

·       Coal – regulation continues to batter this sector

There are fewer chemical tanker loads right now. 
What This Means for Truck Freight

We see truck loadings down slightly, a minor deceleration of growth. Q1 weakens and Q2 weakens some more. This means our forecast for 2015 freight growth is now in the 3-4% range, down from 4-5%.

Much of this weakness is in the Dry Van trailer sector, especially in commodities hauled a long distance. The liquid tanker sector is also suffering due to the slowdown in chemicals and petroleum. The Bulk/Dump sector is down slightly, and the Refrigerated Van and Flatbed sectors are holding up well.

What This Means for Rail Freight

On the rail side: Grain, Lumber and Wood, Chemicals, and Motor Vehicles are doing well. Coal, Frack Sand, Petroleum, Pulp and Paper, and Metals are weaker. Overall, the rail freight 4-week moving average is down 2.6% year-over-year.

The Wild Cards

Normally this freight situation would be cause for alarm, however there are two external factors impacting the data. The recently settled West Coast port strike restricted component parts from getting to some manufacturers causing disruptions. It also prevented some products from shipping out. In addition, it has created major problems for intermodal freight.

The second factor is the Siberian Express effect in February. Last year’s Polar Vortex caused major disruptions to manufacturing, especially in the Midwest. I do not see the similar trends from the Siberian Express this year. It did have an impact on commerce, especially retail sales, but it did not have a big impact on the industrial side.

Therefore, we know freight and economic growth are slowing, but we don’t know if it is a short-term situation caused by these abnormal factors or if there are other reasons behind it. The data and the trends are unclear, making it too soon to tell.

Service Sector Still Lags

Manufacturing (and thus freight) has been stronger than services in this recovery. It is usually the other way around and, therefore, we have been expecting the service sector to catch up. This has been confusing; however, maybe the depth and nature of the Great Recession provides an explanation. Many services are substitutable, meaning you can perform the service yourself. So maybe people are still doing their own landscaping, painting their houses, and grooming their pets, instead of paying others to do it. Real unemployment is still high and incomes have not recovered, so this would make economic sense.


If we now expect freight (and manufacturing) to grow around 3.5% this year, then, based on the last few years, the economy would be growing slower than that, somewhere in the 2.5% - 3% range. This is consistent with most current economic forecasts. My prior analysis of leading economic indicators would indicate the port strike and weather are minor factors, and the overall trend is pointing to slower growth.

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

Wednesday, March 18, 2015

I’ve Lost That Economic-Loving Feeling

I’m kind of losing that “economic-loving feeling.” The ISM (Purchasing Managers) Index is weaker, exports are down, construction down, factory orders down, retail sales are below expectations, unemployment claims are up, and the Q4 GDP was revised down to 2.2%. Is this a problem?
It’s difficult to tell. The West Coast ports will be constipated for at least two more months. Not getting the stuff in hurts retail sales and increases manufacturing costs; not getting the stuff out really slows exports. New England is still literally buried in snow, and this year’s Siberian Express made the Polar Vortex put on a sweater.

So let’s check out some forward looking economic indicators to try to find an answer:

ECRI (Economic Cycle Research Institute) Weekly Growth Index

This index used to be “money” before the Great Recession jumbled all the economic data, but it still is reliable at forecasting the direction of the economy. The index peaked around May and has been running in negative territory since October. Considering the index is designed to forecast conditions six months out, it says things should start weakening about now.

The Call:  Very Interesting – but not in a good way.

Leading Economic Index (The Conference Board)

Up 0.2% in January, 0.4 in December, and 0.5% in November on the surface it looks positive, however their last summary says that “growth has moderated in recent months” and there is “downside risk” for the economy.

The Call:  Nervous about this “downside risk” statement considering the current environment.

Home Builder Confidence Index – (NAHB)

Down two points to 55 (50 is neutral), attributed to bad weather across much of the nation (although the index is supposed to be forward looking). The good news: housing is holding steady with the 2015 forecast. The bad news: housing is holding steady with the 2015 forecast.

The Call:  No news is fair news. If things are slowing, it is not due to the housing market.

Moody’s Survey of Business Confidence

“Confidence is especially strong in the U.S. where businesses are feeling good about sales, hiring, and investment.”

The Call:  Business executives still expect 2015 to be another decent year.

The NFIB Small Business Optimism Index

At 98.0 in February, basically flat from 97.9 in January. This index has stalled out, after a strong run in Q4.  It peaked at 100.4 in December, the first reading over 100 since the Great Recession.
The Call:  Hard to call, but there is a good chance it indicates moderately slower growth.

Bloomberg Consumer Comfort Index

This weekly measurement of consumer confidence was up 70 basis points to 43.5. However, this index had been declining in February and is still near its low point for the year. The “National Economy Subindex” portion hit a seven-and-a-half high in January, and then started to fade.
The Call:  This index is fairly reliable and it indicates consumer sentiment, and, therefore, future retail sales are weakening.

Philly FED Manufacturing Business Outlook Survey

The diffusion index for current activity fell slightly to 5.2, from 6.3. The diffusion for general future activity did take a noticeable dip however and is the lowest point in two years.

The Call:  It does appear that manufacturing growth in 2015 will be slower than 2014.

What It Means

These indicators, as a group, point to slower economic growth for the first half of 2015. Does this mean weaker than the 2.2% of Q4, or the 2.4% of 2014? Hey, I guess it doesn’t matter much, does it? None of the indicators are flashing “red” yet, except for the ECRI, so I think growth continues in 2015. The good news, if any, is that the economy is not overheated, so maybe just ease into the next recession, whenever that occurs.

The Scoop

The Wall Street Journal’s economic panel is forecasting GDP at 2.7% in Q1 and 2.9% in Q2. Based on these forward looking indicators, I’m betting on the “under.” 


Yes, I’ve lost that economic loving feeling – “Now it's gone...gone...gone...”

Friday, March 6, 2015

How Is Your Industry Functioning After The Great Recession?

The Great Recession has led to the Great Reset.  It was so disrupting that industries, markets, and leading economic indicators have been thrown off kilter.  Even though we are into the sixth year of the recovery, many industries remain dysfunctional is some way.

This clock was very accurate before the
Great Recession
Below is an example of what is happening in the Class 8 truck market.  It is having its best year since 2006, yet the traditional methods of tracking and forecasting the market are still unreliable.  The forces of demand and supply are of course active, but the environment is very different than before.


Strange Happenings In The Class 8 Truck Market

Something strange is happening in the Class 8 truck market. We just had record quarterly orders in Q4, making 2014 the second-highest order year ever. This order deluge has pumped up backlog to the highest point since 2006.

So you would expect production in 2015 to get off to a rip-roaring start, with factories going full-out to churn out loads of trucks to satisfy this torrid demand. However, this did not happen. January production was much below expectation, 18% lower than last November, on a per day basis. Factories were easily able to satisfy order requirements without working much, if any, overtime.

What is going on here? It’s not enough to just look at the order and backlog numbers by themselves, it is also important to analyze the delivery dates on the orders and the quarterly distribution of the total backlog.

I had previously posted about the unusually large number of orders placed in 2014Q4 for second-half 2015 delivery. However, what was not obvious at the time was that not enough of those orders were being placed for 2015Q1 delivery to put significant pressure on OEM build rates in the short-term. In other words: many orders for delivery in seven months, fewer orders for delivery in three months.

Yes, order patterns had changed in two important ways, both related to the Great Recession. First, some of the Q4 orders can be considered “catch-up” orders. They should have been placed up to a year earlier but were not, due to residual caution and risk aversion from the Great Recession. It is the pent-up demand from fleets needing new equipment, for both replacement and expansion, but not placing orders because of leftover economic anxiety. By using a new data analysis method, FTR was able to determine that the backlog of six months ago was inadequate to support the expected sales. Therefore, orders needed to increase to support the market environment. We got them, but a few months later than normal.

The second factor is that the Great Recession caused OEMs to reduce industry capacity. Several plants were closed, resulting in capacity falling from 375,000 units/year to 350,000 (new calculation based on November 2014 production rates). Because of very tight production capacity in Q4, fleets were motivated to place large orders to reserve production slots in Q3 and Q4, 2015.

Truck OEMs are resistant to investing in new fixed capacity because of the cost and the cyclical nature of the business. These types of decisions are being made throughout the industry. One component supplier that closed three plants during the Great Recession opened a brand-new facility last year.
At this point, it looks like the extra-heavy Q4 was the result of OEM sales strategies to try to gain or lock-up market share this year. It does not appear the huge orders signaled record sales, and production capacity should not be maxed in 2015. Of course if the economy and freight grow faster than forecasted this year, increasing truck demand could indeed maximize production.

Things are different on the trailer side. The orders have been huge, but most of the major OEMs are running at full capacity and expect to stay that way through at least Q3.

How Is Your Industry Functioning After The Great Recession? I would like to hear about the struggles you are facing.  Please email me at donake@outlook.com



Wednesday, February 11, 2015

Where’s The Beef(y) GDP?

Gas prices are down 43% since June! This will pump $300 billion in the economy this year! Households now have an extra $1,000 to spend in 2015. Consumers are going spend this windfall like crazy people! So the first economic report is issued that reflects the big economic boost and Q4 GDP comes in at 2.6%! Whoa, wait, 2.6%? That’s it?  What the heck happened? Where's the beef?

Part of the explanation (not related to consumer spending) is:

-         Other parts of GDP were much weaker than expected in Q4, especially equipment spending which actually declined.

-        GDP had grown at 4.6% and 5.0% the previous two quarters. Since this is anything but a strong and steady recovery, a “slower” quarter should be expected. 

-        Economic uncertainty in the world markets impacts exports and increases risk

Part of the explanation related to consumer spending is:

-         Wage growth is more important than gas prices to consumer spending and this has just started to show positive signs.

-         Gallup says 30 million people still want to find full-time jobs.  That will take 10 years at a 250,000 jobs a month rate. 

-         A survey by Visa indicates consumers are only spending 25% of their gas savings. 

But the news is still good:

-        Consumer spending did increase 4.3% in Q4

-         55% of the Wall Street Journal’s Economic Panel believes lower gas prices will help the economy “Slightly” while 33% believe it will help “Considerably”.

-        Consumer Confidence continues to climb, The University of Michigan Index of Consumer Sentiment rocketed to 98.1, its highest reading since 2004.

-        Retail sales were down in December, but were up 5.3% year-over-year.

Remember, lower gas prices are only estimated to increase GDP by around 50 basis points in 2015, so this is consistent with the 55% of the WSJ economists.  But I do agree with the 33% who said the benefit would be significant.  This is due to more than numbers, it is greater than a spreadsheet calculation.  There is a major psychological boost provided by lower gas prices and to people who have been shell-shocked since the Great Recession it is much needed therapy.

Our obsession with gas prices is a cultural phenomenon.  It is 90% emotional and 10% rational.  We believe we deserve cheap gasoline and we are not happy when the  price is above our expectations.  This effect is so encompassing that when gas prices fall, that approval ratings for POTUS go up.  Those sky-high consumer sentiment scores are climbing because of job and wage growth, but the biggest factor is low gas prices.

Cheaper gas prices will help us get back to some degree of normal.  People will buy more stuff, buy more houses, add more jobs, and take more risks because they just feel more comfortable.  It a word, it creates optimism and this has been lacking since 2007.

And the boost in consumer spending should come soon.  Analysts that follow this say it takes a few months of lower gas prices before the spending increases start.   With consumer confidence high, expect strong January retail sales numbers. (Didn't happen)

Discretionary spending is a good indicator of economic health and these lower gas prices are creating more discretionary income.  I follow the “Sporting Goods, Hobby, Book, Music” and the “Clothing and Clothing Accessories” sections in the Retail Sales numbers because these are the purchases consumers eliminate during bad times and increase during good times.  The news here is very good. 

The Sporting Goods etc. category started accelerating in September and now has four straight increases of year-over-year growth.  The Clothing category saw a 5.3% year-over-year jump in November after being basically flat for many months.  December’s gain was 3.8%. 

Even with consumer spending starting to hum, don’t expect a big gain in GDP.  Business investment is expected to be tepid and the WSJ Economists panel is only forecasting growth of 3.0% in Q1 and 2.9% in Q2. 

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


Monday, January 19, 2015

A Crude Explanation Of Oil And Trucking

Back in October I correctly predicted crude oil prices would fall to $76/barrel, which it did, for about a day. It then keep falling, due to OPEC no longer being able to control the supply, which I also correctly pointed out it that post.Now crude is around $48/barrel and questions are being asked about how this impacts the economy and the trucking industry.

How low will crude prices go?

The lowest prediction I have seen is $20/barrel.  Some very reputable economists are predicting a bottom in the low-to-mid $30s, still others say we have already bottomed out. Word is that supplies are building around the world and OPEC keeps pumping away.  At some point production has to slow and rationality in the markets prevail.  If you split the difference between the bears and bulls in this market, expect around $40/barrel as the bottom.  

When will prices start to rise?

Expect a steady, measured, rise back to a more stable equilibrium point.  The industry experts say this should be $70-$80 a barrel.  There is disagreement on how long it will take to get back up there.  Some economists say as early as six months from now, while others as long as mid-2016.

Why haven’t diesel prices fallen as fast as gasoline prices?

Diesel prices were subjected to some very odd circumstance during the last quarter of 2014.  Diesel prices were around $4/gallon when the fun started.  Some major disruptions at refineries in the Midwest allowed diesel inventories to plunge to near record lows.  If the price of crude had stayed around $100/barrel, diesel prices would have spiked to $5/gallon as the demand for heating oil
(similar to diesel in composition) started to rise.  But just as this inventory crisis was occurring, crude prices started to plunge.  Therefore you had this “tug-of-war” on price.  At first diesel prices didn’t budge, then started to fall slowly.  Refineries are still trying to build inventories back to normal levels, so diesel prices will keep falling gradually.  If crude is still cheap in March (when heating oil demand drops) and inventories are fully restocked, then you will see the full, expected, bottom in diesel prices.

What impact will the lower crude prices have on the economy?

Some economists predict a huge economic boost, while others say the impact is negligible.   A few experts have tried to calculate the impact of low crude prices on GDP.  This is a difficult endeavor because of the sheer mass of the data and the fact that while some industries thrive due to low crude prices, others, especially fracking and other oil related activities, are hammered. These estimates indicate GDP will only be 40 to 80 basis points higher in 2015 due to lower priced crude.  This is certainly a positive factor, but not a boom.  However, these calculations cannot measure the positive psychological boost provided by lower gas prices.  This factor is probably more impactful than normal because most consumers have been in a fearful funk since the Great Recession.

How do lower diesel prices impact truck freight?

Again you have a tradeoff between markets. Oil and exploration related freight will suffer, however other freight markets will grow due to increased consumer spending.  Therefore it is a net plus, but not a big change.  Fleets profits will grow due to lower operating costs, however this is also tempered by the use of fuel surcharges which were implementing when fuel prices greatly fluctuated in the past.  Freight rates should not drop because industry capacity is tight and driver pay is increasing due to labor shortages.

Word on the street is that two large fleets just signed 3-year diesel supply agreements at around $3.50/gallon.   This shows that fleets value price stability over getting the absolute lowest price. It also indicates the fuel industry expects crude prices to stabilize around $80/barrel in the mid-term.

How will lower diesel prices impact the need for new trucks and trailers?

The number of fleets buying new trucks to take advantage of the improved mileage of the new engines could slow.  But you would have to assume that crude prices would stay low throughout the life of the truck, which is unlikely. 

Conversely, higher fleet profits means there is more money available to buy new equipment.  Increased freight due to economic growth would support more expansion demand. 

New trailer demand would but subject to the same trade-offs as the economy.  Trailers used in the energy sector, tanks for example, will suffer.  While the other segments should benefit moderately.
Demand for Class 8 natural gas powered vehicles will slow because the payback period for buying a more expensive natural gas truck is now much longer than it was six months ago.  Sales should increase when crude stabilizes later this year.

Regardless, crude prices fell throughout Q4 as Class 8 trucks set a record for number of orders in a quarter.  So be assured, the market is not being slowed in any way by cheaper crude and it may be helping lead the charge.

Monday, December 29, 2014

Will This Boom Be Followed By A Bust?

Class 8 truck orders were the second highest ever in October (45,639 N.A.) and trailer orders (46,267 U.S.) set a record, shattering the old mark by thousands. Class 8 orders for November are 40,608 and 39,356 for trailers. While these numbers are huge, they are significantly inflated due to sales strategies recently employed by some of the OEMs.                                         
Equipment orders are booming!
Order Inflation
Trailer OEMs and at least one truck OEM have motivated the larger fleets to place orders for most of their anticipated equipment requirements through the second quarter of next year. In other words, they pulled purchase orders forward into October and November which would have normally been received in December 2014 through April 2015. So, although the order numbers are record setting, they are not truly reflective of the current equipment market.
What are the Real Order Numbers?
It is estimated (using previous market share data and statistical software) that approximately 22,000 truck orders and 22,000 trailer orders were “pulled ahead” in October and November.  This means the market is still strong, but not as strong as the raw numbers imply.
Why Did the Fleets Place the Big Orders Now?
Production capacity is very tight in both the truck and trailer markets.  In trucks, capacity was reduced due to plant closures due to the Great Recession.  Those plants will not reopen.  And both the truck and trailer markets, OEMs have been reluctant to invest to increase capacity.
Hot or Not?
Even though the humongous orders and flat-out production give the impression of an over-heated Class 8 market, it really isn’t. Even after the tremendous October and November orders, there were still some build slots open in the short-term. November retail sales were down 2% versus October on a per day basis. This means fleets are not rushing to put new units into service. While this market appears smoking hot overall, it is currently functioning fairly normal for a growing market.
What Now?
The Great Recession devastated the heavy-duty equipment market. When the recovery began it was so weak that everyone was very cautious and minimizing risk was the prominent strategy. This created significant pent-up demand and now that a real recovery is happening, the industry is playing catch-up.
The heavy-duty truck and trailer market is a good example of the impact the Great Recession had on industrial manufacturing in the United States.  The trucking industry was walloped during the downturn.  After the smoke cleared, the recovery was slow and measured.  Industry was overly cautious and risk averse, not knowing if the economy would plunge into another recession.  This created the pent-up demand and when a real recovery started, many businesses were not prepared for it.

What is happening in the trucking industry also shows that the economy is functioning far from normally.  The numbers that the industry typically relies on are now very skewed due to unusual market factors.  In the general economy, the some of the usually reliable economic indicators are still broken.

Now the economy is playing catch-up and this is leading to a boom cycle.  Unfortunately boom cycles are often followed by busts.  This means that by being too cautious at the beginning of the recovery cycle, we may have created bigger problems at the end of it.