Thursday, October 13, 2016

The Economy Is Quiet – Much Too Quiet

Usually I have many more topics for economic blog posts than I have time to write, but not this time.  As I scan the economic and industry news, it is difficult to find any new trends or significant changes that I have not already covered. 

Back in May I warned that the “air was leaving the balloon.”  This prediction turned out to be true, but I never thought about what it might look like now.  It’s like the end of the birthday party when the balloons have deflated, all the cake is gone, and the pony’s been hauled away.  The kids are all standing around wondering what happens next.

It’s quiet, too quiet, eerily quiet.  It’s never supposed to be this quiet.  Is this like a horror movie? You know when it gets this quiet, something incredibly awful is just about to happen, but you have no idea what that might be.  Sure, Janet Yellen could jump out of a closet screaming “Interest Rate Hike,” but beyond that, what could be lurking?

The economy has been subdued for at least nine months now.  Some economists are claiming this is due to a “classic inventory buildup” and that things should get much better soon.  Inventory buildups are caused by businesses over-producing and over-ordering, because they anticipated sales to be better than they actually were.  They expected the demand trend to continue, but it fell short.

There are two issues to be concerned with here.  First, the economy wasn’t growing that great to begin with. So why did it slowdown, and why was this inventory buildup so pronounced? Is there a bigger problem with demand than we know?  Second, when you have a healthy economy, the inventory buildup is less of a problem because a typical return to a stronger sales environment eliminates it quickly, and a noticeable improvement in GDP soon follows.  I sense that our current inventory bloat is going to take longer than anticipated to burn off, because sales still are not at higher levels.

It appears the economy went into a gigantic holding pattern around March.  Some indicators flattened out at that time, and there was also a drop off in the Class 8 and commercial trailer orders and production beginning in April.  There were anecdotal reports of trucking fleets becoming much more cautious about future business conditions, due to declining freight demand and lower operating profits.

Analysts were encouraged when the Manufacturing PMI (purchasing manager’s index) finally got above 50 (the growth line) in March, after six months being under or equal to that value. Unfortunately, there has been only sluggish growth since then, with a “highpoint” of 53.2 in June.  The Non-Manufacturing PMI has been better, but inconsistent. The non-manufacturing sectors have been credited with keeping our heads above the recession waters.  Retail sales have been shaky except for solid months in April and June.  The chart below shows the three factors, I subtracted 50 from the PMI values to make it easy to see the “negative” values.  The retail sales values are the reported percentage changes.  The August numbers do not indicate a “bounce back” from the inventory correction. 

Of course the uncertainty of the presidential election is largely responsible for the economic quietness.  The candidates are polarizing and their economic programs vastly different.  Let’s assume the economy is a difficult jig-saw puzzle, the current player found the puzzle too perplexing and, at some point, gave up trying to finish it, but told us the picture on the table was pretty.  One of the potential new players will look at the current unfinished puzzle from new angles and try to fit new pieces to complete the task, but the strategy, and maybe the results, won’t change too much.  The other player would throw the current puzzle out the window, and then introduce a brand new puzzle.

But then in this stillness, comes a ray of hope.  Consumer confidence in September jumped to its highest level in nine years! Nine years!  And then it is casually mentioned that it is the “strongest reading since August 2007, four months before the start of the Great Recession.”  Oh no, the consumer never sees it coming. Do not open that door, please do not open that door!

 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.)

Tuesday, August 30, 2016

A One-Legged Economy Hops Along

The industrial sectors of the economy recovered stronger and faster than the consumer sectors coming out of the Great Recession.  This was unusual, but it does make sense in retrospect.  Think of the industrial sector as being more rational, and the consumer sector as being more emotional.

The industrial sector expected the economy to recover in some fashion and set about replacing and updating stocks, equipment, and structures, albeit at a cautious, reserved rate.  Consumers, though, had to deal with foreclosures, job loses, depleted savings, a stock market crash, etc.  It was a scary time and, it took years for the fear to subside.

So economic growth was led by industrial, with the consumer limping behind.  This resulted in slow, steady, but choppy, GDP growth.  The good news is that the consumer sector regained some strength last year.  Employment improved, gas prices fell, the stock market began to climb, and confidence sprouted. The bad news is, as the consumer sector rebounded, the industrial sector began to sputter.  So the economy resembled a tag team wrestling match with a new competitor in the ring.

The manufacturing sector regressed for six months starting a year ago, followed by five months of slow growth, which added together, results in very slight improvement over the last year.  The consumer sector has been good, but not great, resulting in the continued slow growth economy.
Now there is concern that the consumer sector is starting to weaken, so let’s look at the numbers:

Consumer Confidence:

The Conference Board Consumer Confidence Survey = Flat in July.

The University of Michigan Consumer Sentiment Index = Basically Flat in August (preliminary).

Gallup U.S. Economic Confidence Index = Improving some, after hitting a low for the year in mid-July.

Therefore, confidence is not improving, but it isn’t declining either. It is steady at a modest level.

Retail Sales:

The advanced monthly report shows July sales even with June and up 2.3% over July 2015.  This is very consistent with the consumer confidence measures above.  Flat Sentiment = Flat Sales.

The Breakdown of the Retail Sales Categories (vs. June):

The Good

-         Motor Vehicles
-         Non-store Retailers
-         Furniture Stores

The Bad

-         Electronic Stores
-         Health and Personal Care Stores
-         Food and Drinking Places

The Ugly

-         Gasoline Stations
-         Sporting Goods and Hobby Stores
-         Food and Beverage Stores
-         Building Material Stores
-         Clothing Stores

The “Ugly” category is concerning.  Most of the stores listed here are highly dependent on disposable income, i.e. discretionary spending.  Of course part of the gasoline decline is due to lower prices, but the total drop was 2.7%, so maybe people are driving less – time to watch the Total Miles Driven data which has been running very positive.

Auto sales are still strong, despite the warning that demand has peaked and will soon start to drop.  Since this has been the most robust consumer category, it makes you nervous.  Recent news reports have also detailed a decline in restaurant sales.  While the July data was up 5% y/y, it declined 0.2% from June.  The Restaurant Performance Index has been choppily declining since peaking in 2015 and is now bouncing around the “100” mark, meaning little or no growth.  So, one of the other bright spots in the consumer economy is dimming.

It is confusing why consumer spending is moderating as the employment numbers grow.  Maybe consumers are nervous about the presidential elections.  Maybe healthcare costs are biting into disposable income.  Are living costs increasing as wages stagnate?

The reason for economic malaise after The Great Recession is that the
economy wasn’t running so much as it was hopping on one foot.  First the industrial foot, then the consumer foot.  Now it looks like the consumer foot is tiring, but the other foot may not be ready to take over.

The economy has been out of sync for a long time.  At some point the consumer and industrial sectors will come back together.  Let’s hope that point is not in the Flatlands. 

Sunday, August 7, 2016

People Stuck in the Employment Shadows

Economists quote labor statistics all the time.  The unemployment rate, number of people underemployed, the labor participation rate, etc.  It is important to remember that these are not just numbers on a page, they represent people – real people with real needs and real fears.

I was reminded of this when “Dave” commented on my blog post “Is the Air Leaving the Balloon”. Dave believes more analysis and concern should be directed at the underemployment situation.  He was downsized in 2013, and it took him over two years to find a position comparable to the one he had.  In the meantime, he was earning 30% less than previously.  He knows of many people, also downsized during that period, who are still struggling to get back to where they were.  From my personal experience after The Great Recession, I know he is correct in his assessment.

Some analysts and politicians may claim the job market is strong, but there are many people in the “employment shadows”; they are hidden in the statistics, and they feel forgotten.  And … there is something wrong about this economic recovery that the numbers aren’t reflecting.  Dave was downsized in 2013, over four years after the job market bottomed out in 2009, and it still took him two years to find a comparable position.  This is far, far, from a healthy economy, and it is not getting much better with time.

The major labor issues are occurring at opposite ends of the demographics.  Older workers got hit hard in The Great Recession.  Many of them retired early or took marginal disability claims because their skills were either too specialized, or no comparable jobs were available to move into.  Some above age 50, but too young to retire, are still faced with being severely underemployed or very long-term unemployment.  Can you see why the labor participation rate has dropped?

At the other end, the youth flocked to college in record numbers to pursue degrees, but unfortunately, a sluggish economy has yet to create jobs for these degrees.  The government and banks provided the cheap, easy cash, the universities jacked tuition, and the na├»ve kids took the bait.  Now you have college grads working two part-time, low-skill jobs just to pay living expenses, with nothing left to pay-off their huge student loans.

This economy is not serving either of these demographics well, and not providing much advancement for the nation as a whole.  This has resulted in the angriest and most volatile presidential election in our lifetime.

Also, the employment numbers do not make sense when taken as a whole.  The U.S. unemployment rate decreased to 4.9% in June.  Economists consider around 5% as full employment, because traditionally a percentage of the work force is constantly “between jobs.”  Wages have been fairly stagnant since The Great Recession.  If everyone who wanted jobs was working traditionally good jobs, wages would have risen substantially, and the economy would be growing in excess of 3%.

However, the employment numbers lie.  We are nowhere near traditional full employment, and there is massive underemployment.  The jobs being created are increasingly low skill, low wage, positions.  I sense the job numbers are even masking the fact that we are trading high-wage jobs for low-wage jobs. Mere numbers may camouflage the problem, but it is a cold reality for thousands of people.

If you had a job, and were able to hang on to that job through the recession, you are doing well.  If you have a skill or acquired a skill that is in demand, you are good.  However, if you got swept away by the recession and your skills are outdated or not in demand, you are struggling to regain your income.  If you are starting out and unable to latch on to an entry-level position in your field, you are a “have not.”  The result is wider income inequity.  Yes, this is a real problem which needs to be addressed.  No, it is not the result of some sinister plan.  It has occurred naturally due to many complicated factors and is difficult to rectify.

Income inequity is a huge issue and a major cause is the lack of higher wage, higher quality, job creation.  As stated above, we may even still be losing these jobs.  To address the shortage of good-paying jobs, politicians have presented two vastly different solutions.

The first idea is to turn “free trade” into “fair trade” and bring back higher-wage production jobs to the U.S.  This could be effective in industries where there are clear indications of unfair trade, but it carries risks if done haphazardly.  So it might improve things some, but the impact has limitations.

The other strategy is to raise the minimum wage.  This is basically creating more “good jobs” by artificially paying workers more than market wages.  You pretend these are higher-skilled jobs by assigning an arbitrary higher wage to them.  This could produce benefits if the minimum wage was adjusted to the “optimum” level, where increased wages produce increased spending, and the number of jobs do not decline substantially. This is fine, except no one knows what this level is, and some economists would argue that the minimum wage is already higher than optimal.  This is a band-aid approach.  There are also pitfalls with this strategy, the main one being the incentive to eliminate jobs with automation. 

The solution is to get the economy growing at a strong rate of over 3%. This is where the debate needs to focus.  This will begin to create the jobs needed to get people employed, reduce the number of people underemployed, and reduce income inequity.  A job training/retraining program/strategy would also help. We need people going back to work, valuable work, and to get them out of the shadows and into the sun.

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, June 20, 2016

Late To The Economic Party?

I have written about this business district twice previously in my personal economic blog.  It is an older business district located between two fairly affluent suburbs near my house.  It is very close to the local mall and big “strip” stores. It is also very accessible to the expressway.   The district is home to many older offices and small businesses which either do not need the street exposure or prestige of being located near the mall or cannot afford the higher rents.

I find this district interesting because I believe it serves as a reliable (tangible and ground level) economic indicator. These are the smaller, more marginal, more fragile, businesses which tend to feel an economic draw back the earliest.  I first noticed the connection before the Great Recession.  Prior to the downturn, businesses in the district started to close even though the mall area was still thriving.  There were empty storefronts and numerous “For Lease” signs.  Male oriented entertainment venues, highly dependent on disposable income, closed.  The self-carwash even promoted “bucket washing”, something that is usually strictly prohibited at these operations.

When the recession did hit, I labeled this area an “economic war zone”.  There were more places closed than open. Long time businesses, such as the pizza parlor, went under.  It looked as if a depression had hit and it was surely depressing to drive down the streets.

However, the second time I wrote about this district was to describe its economic recovery.  New businesses such as an Arabian market and a pet grooming service had moved into vacated buildings.  Two men’s-oriented entertainment venues opened or returned.  No more bucket washing was permitted at the car wash.  A field where an older building was demolished, found use as a display area for a storage barn builder.

Subsequent to that blog post, there was even more development.  A micro-brewery opened in a nicely remodeled building.  The biggest multi-business strip center was given a much needed make-over.  The “For Lease” signs mostly disappeared.

Unfortunately, if you haven’t already surmised, there is a reason that I am writing about this area again now.  About 9 months ago, things started to erode once again.  The Arabian market is gone, so is the pet grooming place.  The men’s entertainment venues are no more.  The car wash has closed.  The “For Lease” signs are increasing at a steady rate.  The district today looks eerily similar to what it did right before the Great Recession.

(And a few days after this post appeared on the FTR website, the largest bar/entertainment place in this area announced they were closing down after many years in business)

This worries me with an economy growing at the GDP rate of 0.8% (Q2 is expected to be 2.4% - FTR). However, what concerns me most is what first appeared to be a very positive development in the area.  A developer tore down an aging office building
(which had a weird 1970’s oriented design) and constructed a beautiful new office building designed to house five companies.  The building was completed promptly and the “For Lease” signs appeared around the beginning of the year.

And --- it sits empty. Considering you would begin to market the property when you were constructing it, that’s over seven months with no takers.  Of course, the property could be over-priced.  Let’s hope so, because there is always some builder or investor that takes a risk and the end of the economic cycle that later really wishes he hadn’t. 

Let’s hope this developer wasn’t extremely late to this party, even to a party that was never that spectacular.

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.)

Tuesday, May 31, 2016

Is the Air Leaving the Balloon?

It is interesting to watch economists try to describe and predict the current economy based on previous trends and once reliable economic indicators.  It is similar to watching the political experts and pundits try to analyze and predict this year’s presidential race based on history.

This is new territory; we haven’t been here before.  So how can we ever know what awaits us around the bend?  Yet, as we slowly make our way to that bend, one can feel a collective economic nervousness.

Most economists expect the economy to revert back to the slow growth mode of the previous seven years.  Some are calling for a mild recession, with a few calling for a deeper one.  Almost no one expects the economy to jump back into a strong growth mode very soon.  In the Wall Street Journal economist survey (over 70 economists), no participant is predicting anything close to a recession and only two are forecasting future growth at over 3.5%.

The best argument against a recession is that downturns are usually the result of excesses, or overheating, in some area of the economy.  A negative offset to some positive overreach.  Because you have no apparent excess in the economy right now, there is nothing to react to, no bubble to burst.  In other words:  no cycle up; no cycle down.

Yet, the economy has been slipping downward for months now and many signs I watch are currently turning, but not flashing yellow.

-         Manufacturing went into recession (six months of no growth beginning in August).  This recession stopped in March when the ISM Manufacturing Index hit 51.8 (over 50 equals growth).  April’s number went down to 50.8, barely growing.  So manufacturing did not “snap back” from its downturn, more like it crawled out from the pit, and it remains weak. 

-         Business inventories are bloated, because businesses continued to stock based on expectations that consumer spending would continue to increase at a healthy rate.  When spending slowed, stocks swelled, and manufacturing skidded (the weak world economy also hurt exports).

-         But what’s wrong with consumer spending?  Higher employment and the low-price gasoline dividend were supposed to boost disposable income and lead to greater economic growth. Retail sales did rise 1.3% in April, after a 0.3% drop in March.

-         Something is happening with disposable income.  My disposable spending index has been down the past two months.  I am hearing reports that charitable giving is weaker in 2016.  Could this be the result of higher healthcare costs?  Is this acting as an invisible tax?  Could the savings rate be increasing because people are reacting to higher deductibles on their policies?

-         Business investment continues to be tepid.  There is a lack of confidence in the future, and businesses are not spending much money right now.  Factory orders have been weak for several months now.  Normally a decrease in business investment precedes a recession; however, businesses were not spending much before (no excess bubble here), so it is consistent with a slow/no growth economy.

The latest Q1 GDP revision has the economy at 0.8%.  This is the third straight quarterly drop, but this particular pattern has been repeated several times in this recovery, with the economy then returning to moderate growth.  Could it be different this time?

This economy feels like the air is slowly being let out of the balloon, that it is sluggishly running out of gas and coming to a stop.  When I expressed this theory to a colleague recently, he challenged me by asking when this had ever happened to the economy before.  And, of course, I had no good answer.  The best I could muster is that it happened last when we had a Great Recession,
Our smiles are fading .....
due to a major bubble, which the government injected billions into the economy to save it and then held interest rates extremely low for eight years, in which GDP never exceeded 3% in any year.  What a strange mess of things, no?

Maybe this is what a downward adjustment looks like under these conditions.  A couple quarters of “resting” and then a continuation of growth, albeit slow growth.  The forecast?  Things are getting worse, but not real bad.  Then things will get better, but not that good.  Second verse, same as the first…or maybe the last seven, for that matter. 

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, April 25, 2016

How are men’s underwear sales similar to the flatbed trailer market?

In the 1970s, former Fed chairman Allan Greenspan developed the “Men’s Underwear Index” as an economic indicator.  The theory is that increases in men’s underwear sales signal an economic recovery.

The logic is that men will forgo replacing their haggard shorts during a tough economy, but when a recovery begins, new skivvies are one of the first purchases a guy makes.  This index only works for men’s underwear, because women are usually much more diligent in replacing older undergarments. 

This index was recently back in the news as a report was released showing men’s underwear sales peaked in 2006, followed by three straight years of decline, with a bottom (no pun intended) in 2009.  Since then, sales have risen (no pun intended) steadily each of the last six years and are about 16% higher than 2006.

While the Men’s Underwear Index is an interesting economic indicator, I do not find it very useful.  For one thing, it is not as predictable as it was in the ‘70s due to the proliferation of styles and types of men’s underwear.  The “tighty-whities” and plain boxers were much more generic in price and durability, providing more consistency to sales and replacement cycles and, thus, the index.  And though there is high correlation, it has to be tightly tied to the employment numbers, which are already reported on a monthly basis.  This also means it is a lagging (perhaps more like a sagging) indicator, which means it just confirms what has already taken place.  By looking at the current graph of men’s underwear sales, I can determine that a slow and steady economic recovery has taken place since 2009, with good employment growth.  Nothing really new here.

Flatbeds are the men’s underwear of the trailer industry.  For whatever reason, during tough economic times, flatbed fleets will do whatever is necessary to delay replacing worn out equipment.  They will repair old trailers over and over again until the trailer is unusable.  When the economy starts to improve, there is tremendous pent-up demand, and flatbed sales take off and stay healthy until the next economic slowdown.

Flatbeds are also the trailer type most representative of the total U.S. economy.  Flatbed freight includes a wide range of products including industrial, consumer, and consumer-related goods.  This makes flatbed trailer sales a ready-made economic index of the U.S. economy.  It uses the same logic as the Men’s Underwear Index, but it is much more inclusive and expansive.  For example, the cut back in energy exploration is hurting economic growth.  This factor is also reducing flatbed freight and, therefore, flatbed sales. 

In addition, flatbed trailer manufacturing is very representative of “heavy” manufacturing in the U.S.  Factors that impact industrial manufacturing will tend to impact flatbed manufactures more than those of other trailer segments.  So it can represent the state of current manufacturing, to a degree.

Flatbed sales would also tend to be a better economic indicator than men’s underwear, because the flatbed trailer market is more sensitive to economic changes, meaning the cycles are more pronounced and easier to identify.  The underwear data is reported later and is often stale. 

What is the Flatbed Market Saying Now?

Here is a chart of flatbed trailer build since 1995 and the previous two recessions (blue bars):

Source FTR
Two important things are evident:

-         The flatbed market is subject to strong business cycles, and this market started a strong descent more than a year before the previous two recessions.  The market peaked this time in April 2015.

-         Flatbed demand hits bottom at the very end of a recession.  This is very consistent with the replacement cycle described earlier.  At the first sign of economic recovery, flatbed fleets need to replace badly worn trailers.

Flatbed trailer demand started to drop in July, a couple months before manufacturing in general began to slow.  It has steadily declined, but has stabilized some the last two months.  This is an indicator that needs to be watched.  However, you might want to buy some new underwear now, just in case.
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, March 21, 2016

Expect A Recession By Year End – So Says The Commercial Truck Market

Right into the Danger Zone
Highway to the Danger Zone
Right into the Danger Zone
                             Kenny Loggins

Economic recessions are incredibly hard to predict.  The next one, even more so, because the Great Recession was so impactful that some economic indicators and industry cycles have yet to return to a “normal” state.

This is important because forecasters use current conditions, combined with past conditions and trends, to predict the future.  If you do it any other way, you are either guessing or you are psychic.  Now I have been accused of being psychic, which is actually a good thing in this case.  It means your forecasts are accurate and people can’t figure out how you did it.

Regarding the upcoming recession (everyone can agree that recoveries don’t last forever), there is naturally a wide divergence of opinion.  That is because a wise man once wrote “Economic recessions are incredibly hard to predict”.  The forecasts regarding the next 12 months are:

There Definitely Will Be A Recession

Rogers Holdings Chairman Jim Rogers said in a recent interview there is a 100% probability there will be a recession before March 2017.  Rogers is a well-respected investment executive, so when he says 100% it gets your attention.  So it’s looking bleak in Mr. Rogers neighborhood.

There are many other economists predicting a recession.  They make solid, logical, arguments using the standard charts and graphs.  They explain that the yield curve is not yet inverted (a recession predictor) but they can explain why it really is, or should be.

There Definitely Won’t Be A Recession

You can read commentaries and analyses from other respected economists proclaiming the economy is fine, is expected to get better, and there is no recession in sight.  They also use the standard charts and graphs to buttress their forecasts.  And after all, the yield curve is not inverted.

ECRI (Economic Cycle Research Institute), whose specialty is forecasting recessions, is not predicting one yet, even though its leading index is steadily declining.  The institute is probably being cautious after forecasting a recession in 2012, which never happened.  FTR is forecasting continued weak economic growth, but no recession.

Using The Commercial Vehicle Equipment Market To Calculate The Next Recession

Reading all the commentaries and analyses is confusing, so what can the commercial equipment market tell us about our economic future?  Well, our industry is a leading indicator for the economy.  I determined this years ago when my bosses assigned me the difficult task of finding the leading indicator for the commercial vehicle market.  After month of study I determined there was nothing in front of us, therefore we’re the lead car on this train.

My theory was confirmed soon after that when I attended a presentation by a General Motors economist and she said they track commercial vehicle sales closely because it is a leading indicator for the general economy.  This is not a new phenomenon.  The Dow Theory, developed in the 1930’s, states that the Dow Jones Transportation average is a key barometer to the future condition of the economy and the stock market. 

How It Works

We are going to construct a simple model based on North American Class 8 truck demand. We will take the peak month in the last two upcycles and then measure how long it took after that peak for the general economy to enter recession.

I know this model is so simple that a fifth-grader can understand it, but I like simple models and it does have logic behind it. Truck demand is very cyclical and the economy is also.  Therefore if truck demand is a leading indicator, it should always hit a peak before the general economy.  It also makes sense that trucks haul goods and if you need fewer trucks now, then you are hauling fewer goods in the future and economic growth should slow.

The Model

1. Peak Class 8 Production = October 1999
Recession Begins = March 2001
Gap = 17 months

2. Peak Class 8 Production = October 2006
Recession Begins = December 2007
Gap = 14 months

This time:
Peak Production = June 2015
Expected Start of Next Recession = August 2016 to November 2016

Because the current truck demand cycle is very similar to 1999-2000 (so far), let’s say the model is predicting a recession beginning in Q4 this year.  Hang on, we are about to go right into the Danger Zone.