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

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.

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.)