Tuesday, December 9, 2014

What Is Really Driving This Economy?

Since the Great Recession officially ended in mid-2009, there have been many questions about the speed, strength, and consistency of the economic recovery. Such as:

-        Why has the recovery been so slow?
-        Why has the recovery been so weak?
-        Why doesn’t it look like previous recoveries?
-        How can the economy recover if housing and consumer spending remain weak?
-        Is this even really an economic recovery?

Economists have debated and analyzed these issues over the past five years, but now there may be an answer. A growing number of experts now believe that this is an “industrial-based” economic recovery the likes of which we have not seen in over 50 years.

Transportation industry analyst Donald Broughton of Avondale Partners said in a recent interview, “We are all confused because we are witnessing the first industrial led recovery in the U.S. since 1961.” He added that, unfortunately, no one is still around who remembers what that recovery was like.

I agree with this line of thinking. At FTR (Freight Transportation Research), our data has indicated the industrial, freight-generating, portion of the economy has been out-performing the other sectors for almost two years. We recognized this was an odd occurrence and couldn’t offer a logical explanation. We didn’t think this situation would last very long and expected the industrial sector to weaken at some point. It really hasn’t, although our 2015 forecast is for the industrial sector to slow down a little while the consumer sector picks up. Mix it together and you get a much more balanced economy growing at a more typical 3% rate.

Does this mean things have returned to normal? Possibly, but if so, there is still much damage from the
Great Recession left over because we never had a Great Recovery to fix it. The labor markets are still broken, with the real unemployment rate too high, wages stagnant, and a low participation rate. The financial markets are still messed up. Credit availability is inconsistent, and society, especially the stock market, is hooked on 0% interest rates which have lasted oh so long and will be bitterly painful to let go of.

Many economists expected the housing market to lead us out of recession as it usually does. Analysts panicked when housing sputtered. This caused some people to erroneously claim that no recovery was taking place. The housing bubble burst so violently that it will take a few more years before the market returns to “normal.” Or course normal would be the early ‘90s before easier mortgages began inflating the bubble.

No, this recovery could not wait for housing to lead, so heavy industry took the lead. This is the reason freight growth has been so steady and one reason new orders for Class 8 trucks and trailers have been so high.

We can see how this plays out in the real world, by examining the flatbed (platform) trailer market. Flatbed trailers are usually the last segment to recover after a recession. Trucking fleets tend to run these trailers for more miles at the start of a recovery and delay replacing them. This creates pent-up demand and, at some point, flatbed trailer demand becomes very strong. However, flatbed trailers carry most of the materials involved in house construction, so traditionally the housing market is a significant river of flatbed trailer demand.

With housing expected to be slow in 2014, my initial Flatbed Trailer forecast was for no growth this year. The current forecast has 2014 growth coming in at 10%, and this was after a very slow Q1 due to the bad weather. How is this possible with housing starts still sluggish? Because flatbeds carry products connected to the industrial sector, and this industrial sector is running strong and leading this recovery. Can you imagine what would be happening if housing was growing at a faster clip? GDP growth could be at 5%, flatbed trailer production would be up 20%, and it would be the big, snap-back
recovery that we were told to hope for, but never materialized.

The industrial sector was so strong that flatbed freight was the strongest freight segment for most of this year. However, flatbed freight growth peaked in the summer and has dipped noticeably since then. This is not a good sign for an economy being driven by industrial markets. Is this the canary in the economic coal mine? Too soon to tell, but we need to watch this bird carefully.

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, November 12, 2014

The Humpty Dumpty Housing Market

Almost all of the recent reports on the housing market have been disappointing:

-             Price gains are slowing, signally a slower market. Some price indices are now under 6% year-over-year, the lowest growth since 2012.

-             New Home Sales continue to limp along. Sales year-to-date through September up only 2.4% year-over-year. (yawn)

-             Existing Home Sales (September) down 1.7% year-over-year, with inventory basically flat for the past 18 months.

-             Housing Starts (September) still a boring 1.017 million (Seasonally adjusted annual rate), with building permits very close to that level, up 2.5% year-over-year (more yawning).  The latest 2015 forecasts are only in the 1.16 million range.

-             Mortgage applications down 6.6% in a recent week (Mortgage Bankers Association), to the lowest level since February.

-             The Housing Vacancy Report from the Census Bureau calculates the Home Ownership Rate at 65.2%, the lowest since the 1960’s.

-             The National Association of Home Builder Index is at 54, still in positive territory but down five points from the previous month.

It is no surprise that housing has hit another soft spot.  This economic recovery has featured a series of false starts that has confused economists and frustrated politicians. Most industries, including trucking and truck equipment, have already experienced this pattern.  The housing industry, falling the most and hitting the bottom last, is subsequently the last industry to recover.  Its growth has been painstakingly slow.

Due to the severity of the real estate crash it will take years for the market to function normally. Right now the market is very dysfunctional because:

Buyers Don’t Want To Buy

-          The Emotional Reasons

There is still fear left over from the Great Recession.  The massive layoffs meant either your job got wacked or you know somebody whose job got wacked.  People without houses would rather rent than take on risk or debt.  People with houses are not really interested in trading up to more expensive dwellings for the same reason. People are not moving long distances to take new jobs (and buy new homes) as they did in the past.  People are still fearful of taking on more risk.

-          The Logical Reasons

There is just not as much money available to spend on housing.  Many people are making less money than before the Great Recession.  If they lost their home, they don’t have enough money yet to buy another one.  For many others, wages are stagnant which doesn’t encourage first-time buyers and doesn’t promote trading up. And finally there are the Millennials who should be starting households, in of course houses, but are straddled with high student loan debt, low-wage jobs or a no-wage existence.

-             The Cultural Reasons

The Millennials are cohabitating in record numbers.  While this may qualify statistically as a household, it does not immediately involve a long-term commitment.  Because buying a house usually comes with a long-term commitment, known as a mortgage, cohabiters are much more likely to rent than buy.

To Baby Boomers, owning a house was a central part of the “American Dream”. Buying a house was an expected part of your lifestyle and the size of your house a visual representation of your success. This idea has become less prevalent for each successive generation and home ownership is much less important to Millennials.

Sellers Don’t Want To Sell

-             Prices are still depressed. Many homeowners are still underwater, but this condition has improved significantly this year.

-             There are risk factors in making a change and there is limited trading up activity as mentioned previously.

-             People are not relocating much for new jobs.

Bankers Don’t Want To Lend

-             Interest rates may be low, but requirements and standards remain inflated.  If you qualify, you can eventually get a loan, but the process is reported to be onerous, frustrating and lengthy.

Putting It Back Together 

When a bubble bursts it is messy.  As messy as a huge egg falling off a wall.  So call this the Humpty
Dumpty housing market.  It must be put back together again, but oh was a difficult job that is.  Much too difficult for the King’s horses and men.  Getting this market back to “normal” is going to take a long, long, time.

This post first appeared (slightly different version) 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, October 21, 2014

Get Ready For The Return of $3 Diesel (and $2.60 gas)

How low can you go .......?

After several years of stability there is now a major shake up to fuel prices. Crude oil prices are falling like a rock. Currently at $86/Barrel (or down a $1 since I started gathering notes for this post, which means I have to type faster. Original posted 10/15)  This is down from the June average of $105.

The main reason for the drop is falling world demand.  The economies of Germany, China, Japan and Brazil are all experiencing weakness.  The U.S. would seem to be the only economic superpower with any momentum. 

Another big factor is the increase in U.S. crude production.  While natural gas gets all the headlines, fracking has also freed up vast reserves of crude oil.  So you have conditions of decreased demand and increased supply, leading to a large oversupply of oil.  I don’t have to draw you a graph on this one.

The forecasts are for crude to drop to $76/Barrel.  At that point you will see $3/gallon diesel coming soon to a truck stop near you.  This would further pump up the trucking industry and be a positive for carriers and shippers alike. (Industry people claim fuel surcharges don’t recoup all the additional costs)

Gasoline costs have already dipped below $3 in many parts of the country. $76 crude would result in pump prices around $2.60.  This is a big deal because gas prices act like a tax on consumer spending. Cullen Roche of Pragmatic Capitalism estimates that for every $10 change in crude prices, consumer spending is impacted by $25 billion.  So a drop from $105 to $76 would infuse billions of dollars ($70 billion annual rate) into the economy right before the holidays.  Merry Christmas indeed.

And don’t give any credence to those articles claiming that lower crude prices are “not always a good thing”.  Yes there are some negatives, but $70 billion additional spending annually is a great thing, period. 

$3/gallon diesel prices would negatively impact the conversion to natural-gas powered vehicles (NGPV).  Sales of NGPV Class 8 trucks had slowed this summer due to the new higher efficiency diesel engines elongating the payback period of NGPV. And this was at $4/gallon diesel.  At $3, who is going to buy one?  Who knows what other industries will be impacted by lower crude prices?  This turn of events may have even fracked up the natural gas market in the short-term.

Crude is how low?!!!!!!!
More importantly, crude prices may not stop at $76/barrel. Reportedly, Saudi Arabia is running around slashing prices to customers like a used car salesman.  Iran and Iraq are also doing the same thing while maintaining production levels.  This is not the Arab Spring, but the Arab Spring-A-Leak.  This could result in the end of OPEC as we know it. 

It was assumed that OPEC’s ability to control prices would diminish over time as U.S. and other countries increased production, but like other world events, it could happen much sooner than expected.  

What is the free market price of a barrel of crude? No one knows because it has been a long time since the market was “free”.  How low can it go? Well, we may get a chance to find out and the price may be ludicrous.

This post first appeared (slightly different version) 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, October 7, 2014

Confidence In The Economy Is Gaining Steam

The Great Recession produced great fear, and this fear generated economic anxiety that has persisted long after the recession ended.  It has taken years for the trauma to fade, but now in the trucking industry confidence is overcoming the anxiety.

The Reasons for This Confidence:

·       The economy is not falling back into recession
·       The economy continues to grow
·       Freight is growing at a steady pace
·       Fleet profits are growing due to freight growth and a manageable cost environment
·       Reduced uncertainty, which includes knowing the impact of Hours-of-Service regulations and the better than expected performance of the new engines.

The increase in confidence in the trucking industry began last December, and it appears this confidence is starting to spread to the general economy as recent GDP forecasts are improving.

Let’s look at what the latest numbers on economic confidence are telling us:

The Conference Board Consumer Confidence Index

Down to 86 from 93.4 in August - this index was at around 110 before the recession and fell to below 30 in 2009.

This index fell significantly after rising four straight months.  This is probably due to geopolitical tensions including the resumption of military action in Iraq. However, part of the decrease is attributed to a perceived mild softening of the job market.

Thomson Reuters/Univ. Michigan Consumer Sentiment Index

Up to 84.6 from 82.5 in August vs. 77.5 in September 2013 – this index peaked at 98 before the recession and bottomed out below 60.

This index rose based on positive outlooks for the economy and expected growth in personal income.  Consumers anticipate modest job growth in the next year.

Bloomberg Consumer Comfort Index

Down to 35.5 from 37.2 last week, but up over 2% from last year. This index was around 50 before the recession and bottomed out at 21. 

This index fell to its lowest point since early June.  It is attributed to “negative views of the national economy,” and that sub-index fell to its lowest point since May.  Since most economic news of late has been positive, it can be assumed the decline was caused by factors in the Middle East. The personal finances and buying climate sub-indexes held up better.

Moody’s Analytics –Survey of Business Confidence (World)
Down to 34.4 from 35.5 last week

This survey found business confidence is very strong in the U.S., near record highs.  There is strong confidence across all industries, especially in real estate and manufacturing.  Expected employment gains in this survey have never been stronger.

The Conference Board Measure of CEO Confidence

Q2 – Down to 62 from 63 (Readings above 50 points reflect positive attitudes.)

CEOs remain positive in their outlook for 2014; however, the strength of their confidence is starting to level off.  A large majority of respondents expect higher profits this year.

National Federation of Independent Business Optimism Index

August index at 96.1 from 95.7, the second highest reading since October 2007.

Small business owners are remaining cautious.  Hiring plans have flattened out, and they do not expect sales to increase much the rest of the year.  They are also not expecting to increase capital spending or increase inventories substantially.

What It Means

Consumers continue to feel better about economic conditions.  You can see the impact of the recent military actions on the data.  It can be assumed the Reuters/ U Michigan data was collected before the other two indexes and was not influenced by the geopolitical news.  This means the October readings should be more positive.  In general, growing consumer confidence translates into future retail sales.  Therefore, we can expect the consumer segment of the economy to remain healthy.
Rail freight is also very strong right now!

The business sector also looks to be in good shape.  Spending and hiring should continue to improve.  Because pullbacks in this sector are often the first signs of recession, there is little chance of a significant dip in the next 12 months.    

However, it is interesting to note that small businesses are much more cautious and less optimistic than big businesses.  This is consistent with what we have seen in the commercial vehicle markets.  The large fleets started buying early and more aggressively.  Then the medium-sized fleets joined the party, and finally, the smaller fleets are buying more trucks and trailers.  Likewise, the medium-duty trucks, which are used primarily by small business, are still not seeing the sales increases you would expect in this economic recovery.

This post first appeared (slightly different version) 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, September 5, 2014

The Economy Could Use A Visit From Dr. Phil

A realtor friend told me the current housing market in Stark County (Canton, OH) is very frustrating for him.  He has many interested buyers, but there are not enough attractive homes for sale to meet this need.

Under normal conditions, this would be considered a “sellers” market because demand exceeds supply.  However, there is not enough selling going on because people are still reluctant to sell their houses.  The perceived value of the properties is still low, and people do not want to sell at a loss.  Under these conditions prices should be rising, but that means sellers would have to have the confidence to list their homes at higher prices.

I don’t believe that is happening yet.  Two homes in my neighborhood recently sold very soon after going on the market.  I doubt if either one were priced nearly high enough based on market conditions (please ignore my bias).

Economists would call this an “inefficient market,” but I call it a “dysfunctional market.”  People coming out of the Great Recession were filled with fear.  Some of this fear was rational and some was irrational.  Some of it quickly faded and some of it stuck around.

And this irrational fear which endures is messing up the housing market and the economy.  People keep asking whether the current economic conditions are the “new normal.”  I would contend that it is the “new abnormal” which will exist until the fear of the Great Recession is past and “normal” levels of rationality returns. 

This could take a while in housing.  Inventories of existing homes are at 2.3 million.  This is up 6.5% y/y, but 35% below where it should be, and still 43% below peak.  Housing prices are also rising, up nearly 8% y/y (Truvia) in July, but pricing growth has slowed recently.  Things are moving in the right direction, but at an excruciating slow pace.

Could be what the economy needs!
This market dysfunctionality has to be present in other industries as well.  Where fear is greater than confidence things are growing, but not as fast as they should.  When you add it all up, you get an economy moving forward at a very cautious pace and careful to jump back at the slightest scare.  Maybe the economy doesn’t need more economists telling it what to do; maybe it needs a visit from Dr. Phil!

Fortunately the trucking industry seems to have shed its fear and regained its confidence.  The Class 8 truck orders and commercial trailer orders started to surge in December and haven’t really backed off when you factor in seasonality.  The 29,500 preliminary Class 8 orders in July were the second highest total for that month ever.  June trailer orders were up a solid 35% y/y. There are other factors driving the market, but I do believe “buyer confidence” remains a significant influence.  

Because people talk and interact much in the trucking industry, this confidence can become contagious and provide strong market momentum.  Growing confidence and scarcity of open build slots may have been a big driver for the huge order volume in July.  It will be interesting to see how orders placed now are converted into shipments going into 2015.

Because the trucking industry can lead the general economy, it will also be interesting to see if other industries can break out of their funk and start growing strong again in 2015.  If this happens, GDP could exceed the forecast (2.9%) next year.

This post first appeared (slightly different version) 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.)

Thursday, August 7, 2014

It’s Time for the Trucking Industry to Get New Pants

Imagine a man who worked a desk job for the first three weeks of every month and then traveled to a jobsite and did exhaustive manual labor the last week. During that week in the field, he also had limited access to food. This guy would be able to predict his fluctuations in weight, and it would be easy for him to buy the correct size of trousers. All he would have to do is buy the size that fit right before he went to work in the field.  He would lose weight the next week and then gain it back again the next three weeks before repeating the cycle.

For the last several years, up until 2014, it was much easier for carriers to right-size their fleets.  There wasn’t the usual strong cyclical variations in freight demand that are common in the industry.  Freight growth was slow, and the small variations in demand were almost always downward.  So you size your fleet to handle slow growth.  The very few times you run out of capacity, it doesn’t hurt you much because the upturns are mild and short lived.

It was also important to keep your fleet right-sized due to risk.  After the Great Recession, risk management became essential in all industries, especially trucking.  Fleets that had over-extended their capacity died fast and hard.  With this recovery being so tenuous, and the world economy unstable, it was smart to keep your capacity as tight as possible with limited “flex capacity.”

The umpire was over-capacity
Now let’s say our worker’s conditions change. He no longer has to work one week a month in the field, so he doesn’t burn any additional calories and has access to all the food he wants for that week.  Over time he begins to gain weight.  In addition, the government requires clothes to be washed in hotter water than normal, and his pants shrink.  Suddenly all his pants become way too tight and he starts to split every pair of trousers he owns, causing him to buy many pairs of new pants.

Carriers were doing an excellent job managing their capacity and limiting their risk up until late 2013.  At that point, freight growth starting to push industry utilization levels higher.  In addition, the hours-of-service (HOS) regulations started to negatively impact productivity.  Fleets realized their pants were about to split. They were no longer right-sized, they were undersized.  They attempted to flex, but there was not enough flex capacity. 

First the large fleets began to place orders for new tractors, then the mid-sized, and now most everybody.  The orders started to ramp up in December and haven’t really stopped.  Of course this is not the only reason for the upswing.  Carriers have increased confidence now that economic growth will continue. This results in higher replacement demand that was delayed and pent up due to the risk factors.  Also, the energy boom is tying up rail capacity and shifting some freight to trucking.

This increase in truck buyer confidence is also an important factor in the amount of orders pouring in and the timing of the demand.  Fleets aren’t just ordering trucks to meet their current demand; they are buying trucks to meet the expected demand during the peak freight market later in the year.  Therefore, there was no need to take delivery in the first half of the year. This lack of urgency caused some industry players to doubt the substance and the size of this market upturn.  The uniqueness of this upcycle, and this delay in responding to it, currently has the industry playing catch up. 

Because the trucking industry has characteristic similar to many other industries, it is a good barometer to what is going on in the general economy.  If this boost in buyer confidence is happening in other industries, then we should see an increase in business investment.  Sluggish business investment is one of the things preventing GDP from exceeding 3%, so if this is a trend, GDP has a chance (though forecasts are lower) to get as high as 3.5% in 2015.

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, July 15, 2014

Are New Safety Rules For Truckers Backfiring?

I have noticed recently that truckers are driving differently on the interstate.  They appear to be changing lanes more and spending more time in the speed lane.  I would not describe this behavior as “aggressive” driving, because it is not dangerous, just different.  I do want to be clear that I am not complaining about anyone’s driving. The great majority of truckers are excellent drivers, obviously much better than the average person on the road.

However, if I am correct in this observation, something has indeed changed.  What could cause this? My guess is the change in behavior is related to the new Hours-of-Service (HOS) regulations. These are “regulations issued by the Federal Motor Carrier Safety Administration (FMCSA) governing the working hours of anyone operating a commercial motor vehicle. These rules limit the number of daily and weekly hours spent driving and working, and regulate the minimum amount of time drivers must spend resting between driving shifts.” (Wikipedia) 

There has been a loss of productivity due to the regulations, and there has also been a loss of income for many drivers.  It makes sense that truckers would try to be more productive when they are on the road.  This would translate into driving at higher (still legal) speeds and trying to get around traffic that is moving too slowly.

Again, I want to emphasize, this is totally logical behavior.  I would be doing the exact same thing if I was sitting in the truck driver’s seat.  It makes complete sense. 

The government instituted the HOS laws to make the roads safer by providing more rest for drivers, however, if truckers modifying their driving habits to compensate for the lost time, the roads may become more dangerous. If this happens, it would be a classic case of the “law of unintended consequences.” This economic law states that intervention (especially by government) in a complex system, creates unexpected and often undesirable outcomes.  The HOS instance would be considered a “perverse effect” that would cause actions opposite to what was intended (Princeton.edu) if my theory holds true.

Todd Spencer, executive vice president of the Owner Operator Independent Drivers Association, pointed out in a recent article that keeping trucks off the road in the middle of the night increases truck traffic during the day resulting in more interactions and more accidents.  He also says the law does not give truckers the flexibility to avoid congested urban areas during peak traffic.  Others have speculated that truckers may also drive faster to make their destination before they run out of road time.

So maybe I am just noticing heavier truck traffic and the different interactions that result from this.  Regardless, there is the potential for more accidents under the new, “safer” rules.

I don’t know if the HOS mandate will turn out this way, but somebody better be keeping score.  Accident statistics needed to be tracked constantly from July 2013 (starting date).  It also will be interesting to see the statistics on the time of day accidents are occurring.   If accidents increase during the day or in heavier traffic situations, then something truly unintended has occurred.

If accidents do increase as a result of the HOS mandate, of course truckers would be blamed and there would be clamors to tighten the law, not loosen it.  Consider the case of the Wal-Mart driver whose truck collided with a van severely injuring actor/comedian Tracy Morgan and resulting in one death. Reports say traffic was backed up on the highway and the driver failed to stop.

It appears the driver was just within his legal hours of service at the time of the accident.  However, police say he had been awake for more than 24 hours before the crash.  In addition, preliminary data shows the truck was traveling 65 mph in a 45 mph zone.

Based on the preliminary description of the events surrounding the accident, anti-trucking safety groups are clamoring for even tighter hours of service restrictions.  Some claim the trucking industry is “out of control.” 

This case has received great attention because a celebrity was involved, but it is a poor argument for stricter regulations.  You can limit the time a driver is on the road, but you can’t dictate what he does off the road.  If he was awake for more than 24 hours straight, he should not have been riding a bicycle let alone driving a big rig.  Also, going 20 miles over the speed limit and plowing into stopped traffic is not going to be fixed by more rest.  There is clearly something else going on here which should be revealed during the trial.