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 ( 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.

Friday, June 20, 2014

The Trailer Market Doesn’t Trail - It Leads

I had just started trying to forecast trailer market demand many years ago, when my boss hastily entered my office.  He was out of breath from running up the stairs, so I knew something important was up.

“I just came out of the staff meeting. We were discussing the trailer market and came up with a great idea.  All we have to do is find the leading indicator for the trailer market and we then we can forecast it,” he enthusiastically proclaimed.

Of course I wondered how much time it took and how much sheer brain power had been exerted to come up with this seemingly brilliant conclusion.

My boss stood there wide-eyed with an exuberant expression that implied there was something more to this and somehow I was involved.

“What did you tell them?” I asked, as I sensed where this might be leading.

“I told them you would find it!” he announced with a smile.

And then he spun around and left my office as quickly as he appeared, before I could utter one word of protest.

As daunting as the task was, I embarked on it. After all, the executive staff wanted it done and my boss actually thought I could do it.

I looked at all the standard economic data and reports, and none of those worked.  I then tried some other factors more focused on trucking and freight, no luck.  I even tried some obscure indicators that had no logical basis, nada.

No matter what I tried, I could not find anything that proceeded the commercial trailer industry in the economic order of things. And then, of course, there was that magic moment of revelation:  if there is no indicator leading the trailer industry, then the trailer industry must be a leading indicator.  My search was the equivalent of looking for the Holy Grail while sipping wine from this fancy chalice that I found.

Based on that premise, I have compared the trailer market to other respected “early” leading indicators.  Many people believe that the cardboard box market is the best leading indicator around.  It is so well respected that you can buy the monthly cardboard box industry data from a trade organization.  The theory is that before you can ship products, you will need the boxes to ship them in. Increases in box production would precede shipments, which would precede economic growth.

Good theory, but how are those filled cardboard boxes transported?  That would usually be a on a trailer. And what is the lead time for a trailer, from spec’ing, to ordering, to producing, to delivery?  It’s much longer than just making standard cardboard boxes.  In addition, cardboard boxes are used primarily to move consumer goods, which provides an indication of the direction of the consumer market.  Trailers are used to move all types of goods, for a wide variety of sectors.  Therefore, trailers as a leading economic indicator provide a much wider scope than cardboard boxes. 

I have tracked the trailer industry as a leading economic indicator for years, and have found it to be fairly reliable.  It is a better indicator than Class 8 trucks because that market gets too much influence from federal regulations and improved technology.  The trailer market has become a less reliable leading economic indicator as this “stalled economy” has stumbled on.  However, many other respected economic indicators have failed during this time.  For example, the ECRI (Economic Cycle Research Institute) Leading Index, one of the most respected leading indicators, has been less dependable the last few years. 

If you are in the transportation industry but are not involved in the trailer segment, it is still important to track it for all the reasons listed previously.  In addition, the trailer market is literally tied to the truck market, so trailer demand can confirm truck demand and provide clues to where the Class 8 market is headed.  The two markets may diverge in the short-term, but not in the long-term.

And what is happening in the trailer market now? Good things, many good things.  Orders are up 40% year-to-date, backlog is up 30% versus a year ago. 2014 build is forecast to be 8% higher than last year and could go higher based on some of the OEM build plans.  An analysis of trailer market segments indicate that consumer spending will be strong the next 12 months, and disposable income is growing.  Road and other infrastructure spending is expanding at a healthy clip, while housing starts are still moderate.

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, June 4, 2014

When Will The Unemployment Rate Increase?

The economy may be picking up steam, the jobs reports are sounding more positive; so when is the unemployment rate going to increase?  Going to increase??  Yes, increase.

It all has to do with the labor participation rate which has been in the news frequently in this cycle because it remains so high.  During a recession, and during the early stages of a recovery, many people quit looking for work because there are few jobs available.  These people are not counted as unemployed because they are not actively seeking employment and are not factored into calculating the unemployment rate.

However, as a normal recovery progresses, these people reenter the workforce in droves to compete for the many jobs being created.  Since there is still a lag time for these “reentries” to find a job, the unemployment rate can jump up for several months as the labor market resets.  You get a headline that reads:  June Shows Very Strong Job Growth - Unemployment Rate Rises.”  This sends the news commentators into a tizzy and confuses people.

But there is something unusual happening because the labor participation rate actually dropped in April as another 800,000 stopped looking for work.  The rate fell to 62.8%, a 35-year low (back before women started to enter the labor force in large numbers).

Why is the Participation Rate So Low?


Because many baby boomers are retiring, the participation rate will remain lower than peak indefinitely.  Some economists claim this is the only reason for the low participation rate.  However, they ignore the other factors; they also ignore that many older workers were forced out of their jobs by the Great Recession and are too old to start new careers, so they retired “prematurely.”


Government assistance programs increased greatly after the Great Recession. Yes, these were needed to help people in true need. However, a large number of people figured out how to game the system and receive funds without making a serious effort to find work.  Regardless of your political views, the law of economics says that if you pay people not to work, you get less people working.

The Cultural Loss of the Work Ethic

There is a cultural shift going on regarding the “traditional” work ethic in the United States.  People with a strong work ethic have problems understanding this transformation and deride it, but that doesn’t mean it isn’t real.  Many people are avoiding work because they can. Whether it is the government assistance programs mentioned above or relying on friends and relatives, people are getting their basic needs met without having to work.

This cultural shift is largely generational.  I know of one company that closed a unionized plant in the north and transferred the work to a plant in the south.  However, the younger workforce in the new plant was much less productive that the old, and older, workers in the north.

Recently, MSN Money posted an article about how teenagers now do not want summer jobs. It says the number of teens with summer jobs has fallen 30 percentage points since the late 70’s.

This loss of work ethic, especially in the younger generations, has profound implications for our industry.  Older truckers are retiring and fleets need younger drivers to take their seats, but this is not happening.  FTR has been detailing the coming driver shortage and estimates there is a negative 4.3% unemployment rate for truck drivers (we need 4.3% more drivers than we have).  Truck driving is hard work and is not a desirable field to a generation that values hard work less.

We even saw this resistance to factory work back in 2006 when the trailer market peaked.  Some OEMs could not find enough workers willing to do factory jobs to staff their production lines.  Now that the commercial transportation equipment market is growing and OEMs are boosting line rates, this factor will come back into play.  The OEMs that gain market share in this upturn will be the ones that have the best access to new workers.

How Do We Respond To This Cultural Change?

Cultural shifts are very difficult to deal with in the short-term. Here are several of the factors in play regarding truck drivers:


Of course wages have to increase due to the forces of supply and demand, however things are jumbled up.  Because new workers value the job less than current workers, you will have to pay them more.  Two-tier wage plans are common in the auto industry, but there the current workers make more than the new ones and it is fairly easy to implement.  The situation now in trucking is an implementation nightmare.  You won’t find this one discussed in any economics books because it is caused by a major cultural shift.

Work Conditions

There will have to be major concessions to improve work conditions, and not just the obvious ones.  The younger workers have different needs and different viewpoints which require different solutions.  Distribution and warehouse systems may need to change significantly in the long run to accommodate this shift. 


A younger generation raised in a technologically advanced world expects their workplace to be technologically up to date.  It is the equivalent of an experienced worker starting a new job and being issued a Commodore 64.  New workers will not stay with fleets where the technology is not up to their standards, and their standards happen to be higher than yours.


Very affordable training must be available.  Younger workers will expect training to be easy, accommodating to their needs, and inexpensive.  We should lobby hard for increased government assistance in this area.  Considering all the regulations that the government is imposing on trucking that hurts productivity and exacerbates the driver shortage, here is one thing it could do to help us. Come on Uncle Sam, you owe us on this one. 

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 13, 2014

The Economy Is Thawing Out

“Frozen” isn’t just a hit Disney movie, but a description of the U.S. economy in Q1.  But this economic “performance” was no comedy and the initial GDP estimate came in at a paltry 0.1%.  This caused economists to go into full panic mode and to question when economic growth will resume.

And to this I say: Chill.  Okay, that’s not the right term in this instance.  Alright then: Thaw. As in the economy on some days in January and February was literally frozen.  Snowstorms, blizzards and bitter cold shut down economic activity in some locations and severely limited commerce in others.

Some economists claim that the anemic Q1 GDP “can’t all be blamed on the weather”.  I guess that’s true, but this was the most economically damaging winter since 1978.   And 35 years is too long for anyone to remember how that works (similar to forgetting how a recovery looks in my previous post).
It is very difficult to measure the full impact of the weather in Q1. I don’t have insight to how all industries were impacted, but I do have insight on how the commercial trailer industry fared.  I estimate that January production was reduced by 10% due to weather related factors.  Production was slowed also in February to a lesser amount.  The trailer industry is very representative of the U.S. manufacturing as a whole.

Another measure was the capacity constraints that showed up in the FTR freight measurements in Q1.  For example, YRC said Q1 freight flow displacements including service delays, pattern changes, and productivity losses, reduced profit by approximated $20 million. Shippers had trouble
There were many unexpected "Ice Road Truckers" this winter
moving goods during the severe weather conditions (no surprise there) but when freight doesn’t move productively, commerce gets restrained and economic growth suffers.  This may be a simple concept, but it is something the government bureaucracy should be aware of when the slew of planned trucking regulations start to hit.

Further evidence of the weather impact is the government data reporting non-farm productivity fell 1.7% in Q1 after being up 2.3% in Q4, 2013.  Manufacturing hours dropped 1.4%, and remember, Q4 numbers are impacted by the holidays.  Yes, the weather had a huge impact on manufacturing.

Weather issues also impacted the consumer side.  When you are “snowed in” you are not out “consuming”.  You are not going to restaurants, you are not shopping, you are not purchasing services, and you are not traveling.  Some of this business is recovered after the thaw, but not all.

The other thing you see is a slew of economic good news after conditions returned to “normal”. Retail sales, auto sales, manufacturing, industrial production and the leading economic indicators all started flashing positives.  The Economic Cycle Research Institute (ECRI) Weekly Leading Growth Index has been steadily climbing since the end of February.  Of course some of this economic energy is catch up from the “ice age”, but not all.  I believe this “restart” will provide momentum for stronger growth in the second half of the year.

Unfortunately the news about Q1 is expected to get worse.  Economists analyzing the data expect Q1 GDP to be revised downward and of course that would mean it goes negative.  This will lead to more wailing and gnashing of teeth about the economy.  But this is the equivalent of feeling uncomfortable now about how cold it was in February.  It is much better to concentrate on the good things happening in the present and the forecast for the future.

As the hit song from “Frozen” proclaims: “The past is in the past”.  The economy was very weak at the start of year, but it’s time to let it go.

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.)

Thursday, May 1, 2014

A Real Economic Recovery Has Begun – Finally!

I was sitting in my Northeast Ohio office in 1986 when the building began to shake.  I ran out into a hallway where a group of my alarmed coworkers had gathered.

“What was that?” someone asked.

“I’m not sure because I’ve never experienced one before, but I think we just had an earthquake”, I said.

No one agreed with me, although no other explanations were offered.  Just then an older engineer, who had once lived in California, came flying around the corner and enthusiastically asked, “Hey, did you feel that earthquake?”

No one believed it was an earthquake because they didn’t know what an earthquake felt like.  I believe that an actual economic recovery has started, but people are skeptical because they either don’t know or have forgotten what a real recovery looks like.

Now this is totally understandable when you consider that the last “real recession” (I am dismissing the mild recession of 2001-2002) was in the early 90’s, which means the last “real” recovery occurred over 20 years ago.

I believe a real economic recovery started around October of last year.  It was temporarily derailed by the harsh “Winter of 2013-2014”, but is now resuming.  If fact the bad weather may have actually provided momentum to the recovery, similar to bobsledders rocking the sled backwards before pushing it forward.

There is a business district near my home that was devastated by the Great Recession.  It started showing some evidence of life two years ago, but now there are some very obvious signs of recovery:

-         There are four major construction projects in process on the outskirts of the affected region.  There is a repair facility to support the fracking industry. There are two new office buildings, one medical and one professional.  The other project is a full-service hotel.  There is still more development planned and a nearby road is being expanded to support it.

-         The business plaza in the center of the district is being totally remodeled. The owner obviously believes he will have new tenants soon.  The office complex across the street is now at full occupancy, the first time in five years.

-         There is new “high-priced” housing construction in the suburb just west of the area.  A thriving housing market existed there before the recession, but no new houses had been constructed in at least four years.

And those “green shoots” that everyone has been seeking for the last five years are suddenly appearing everywhere.  Hotel usage is up, unemployment claims are down, manufacturing keeps improving, the energy sector has been revived.  Several economic indicators have begun flashing “green”. Yes, this is what the beginning of a real recovery looks like.  It’s just taken forever to get here and we have been disappointed so many times in the past that we are not convinced. 

There are two sectors lagging the recovery: Housing and Employment.  Housing has lagged the recovery from the beginning because it was the last to crash, the worst to crash, and it hit bottom after the recession had officially ended.   Therefore its recovery started late and it has been slow.  This was a different type of recession and this is a different type of recovery.  Usually housing leads us out of a recovery, this time it will lag, but not prevent, it from happening.  Credit is still tight, but once the financial markets fully heal and the job market improves, housing will grow just fine.

The unemployment rate is headed down. It is at 6.7%, 80 basis points lower than a year ago.  Normally this would be great news if it wasn’t for the drop in the labor participation rate.  The Great Recession created significant structural unemployment due to the high numbers of older workers with non-transferable skills who lost their jobs.  These people are going to have trouble finding work even in a recovery.  This makes the unemployment situation difficult to gauge.  I just overheard two business owners (one in manufacturing, one in service) bemoaning the fact that they both were having problems hiring enough workers.  With the increase in business activity, job growth has to follow soon.

The conventional wisdom is that the recovery is still lethargic.  This week a Wall Street Journal headline proclaimed: “Sluggish Recovery Proves Resilient”.  Only 26% of economists in the latest WSJ poll believe GDP will hit 3.5% or higher in either the Q3 or Q4.  The FTR forecast is in line with this thinking, with Q3 and Q4 at 3.1%.

But I believe the “recovery” train has left the station and will only pick up steam the rest of the year. If this is true, growth will be between 3.5% and 4.0% in Q3 and Q4.  It would start to look like a real recovery at long last.

The question that everyone has been asking for the last several years is: How long is it going to take to recover from a recession this severe?  The answer: This long. 

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.)