Tuesday, February 9, 2016

Controlling the Greased Pig

Many important economic indicators are showing an obvious negative trend.  If you would have seen this trend in the past (before the Great Recession) you would have concluded a recession was imminent, and most times, you would have been correct.  Our current conditions point to recession under normal circumstances, but conditions are still far from normal.

For most of this recovery manufacturing has led the way, while services and housing have lagged.  Currently, some analysts are saying we are in a “manufacturing recession” but, at the same time, the service sector and housing are performing much better.  It should be noted that if we are in a manufacturing recession, it is currently a very mild one, with the ISM (purchasing managers) index just under the magic “50” neutrality number.

My index that tracks discretionary spending continues to show solid growth, no doubt helped by the “low gas price” dividend.  The Restaurant Performance Index shows that people are continuing to spend some of this “bonus” for dining out. So, even though certain sectors of the economy are on a downward slope, the economy is expected to continue to cycle within a restricted range. 

I believe this is how this restricted range works:

The economy was overheated and running wild in the run up to the Great Recession, then it spun out of control and started to do significant damage.  The government tried to grab hold of it, but it was like trying to catch a greased pig.  With all the turmoil and calamity, maybe it was more like trying to grab a slick wild boar.

The government was finally able to stop the damage by exerting extreme force over the economy, controlling interest rates, manipulating the money supply, huge bailouts, and, to some extent, regulating the entire financial system.  They then put the pig in a pen.  The pig can move around but is limited by the barriers surrounding it.  The pig never moves to the top or bottom of the pen very forcefully because of the limitations.  When the pig runs into to the top or bottom wall, it instinctively moves back to the middle of the pen.

They scrubbed the grease off the pig, they wrote new rules for the pig, and they nurtured and lectured the pig on proper behavior.  They basically have subjected the pig to the equivalent of helicopter parenting.  You could remove the pen and let the pig run free; however, you don’t know what would happen.  Would you get a nice, clean pig which exhibits proper behavior after years in the pen, or would the wild boar reemerge and start wreaking havoc like before?

This was a topic for debate in the last election.  One argument was to give the pig more freedom and incentive, the other argument was to keep him in the pen.  The pen strategy prevailed. You do tend to want to keep the pig contained, if you doubt your ability to manage it after it’s loose.

The good news is that the pig is prevented from going too far south; the bad news is that it is limited in traveling north.  So we sit in this cycle where the pig moves around, but never really goes too far in either direction.

Therefore, it appears that the economy is just experiencing one of its muffled down cycles.  We have this anemic 0.7% GDP growth for 2015Q4, but the Wall Street Journal Economists Panel is forecasting 2.4% in Q1, and 2.5% growth in 2016 (FTR is at 2.2%).  So, ho hum, nothing to see here, please move along.

A check of the Economic Cycle Research Institute (ECRI) Weekly Leading Index Growth Rate confirms this.  This indicator had been a very reliable predictor of recessions in the past.  This index did take a dip in January, just as it did in 2011, 2012, and 2014…and ECRI is not warning of a recession in 2016.

Of course, world economic turmoil could change this.  It would, however, be the equivalent of removing the south end of the pig pen.  Our government would then be challenged with recapturing the pig and would no doubt return it to the pen; because “you see what can happens if the pig is allowed to run free”.

Unfortunately, one of these times when the economy cycles down, it will not stop, but keep declining into a recession.  When that happens people will look at all the charts that were going negative beforehand and exclaim, “How could you have missed that? It was so obvious!” Yes, just as obvious as the numerous times during this recovery when the economy cycled down and then cycled right back up.

Recessions are very difficult to predict under normal conditions, the next one will be even more difficult to forecast.  We may not even find out about the next recession until after it has already ended.  I can confidently say we will not have a recession – until, of course, we do.

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 11, 2016

A Bumpy Landing for Class 8 Trucks

Class 8 truck orders for Q4 are down 46% versus last year.  The market that looked so strong just a few months ago, has taken a pronounced downturn recently.  Production rates are falling and OEMs are laying off thousands of workers.  What is happening, and why is it happening now?

Industry and financial experts started calling as soon as the signs of trouble started appearing last October.  I reminded people that FTR had been forecasting a Q4 downturn since the beginning of 2015, and now it was indeed happening.  The forecast was built on our Economically Derived Demand model which is designed to predict Class 8 cycles.  I also reiterated that the forecast called for a “soft landing” in 2016.

Not So Soft

My favorite phrase in 2015 was “soft landing.”  I probably said the phrase over 100 times to thousands of people, if you count presentations, reports, webinars, and articles.  “Soft landing” perfectly described what was expected in 2016 and in addition, people liked to hear the phrase because they were fearful of a market crash like 2007-2009.  A relatively mild 13% decrease (for the year after peak) in Class 8 truck build had been forecast for 2016.

Now it appears the landing will not be so soft.  The latest FTR forecast is for a

19% decrease for 2016, with the market at times operating at a rate more than 20% down from just a short time ago.  A bumpy landing, but not a crash as of yet.


A major cause of typical Class 8 industry cycles is OEMs overbuilding in the upturn and then having too much inventory, which results in a deeper downturn.  The financial community was very concerned about this happening in 2015.  The OEMs had assured financial analysts that it would be different this time.  When the financial people asked me about it, I said an overbuild was a possibility but shouldn’t be a big issue because we were expecting something called a “soft landing.”

But the market did overheat and now OEMs are sitting on record inventories, which are causing them to slash production rates and lay off workers.  We’ve all seen this movie before, and this is the part that is painful to watch.  If the OEMs were trying to manage demand better this time, what went wrong?

Warning Signs

There was a troubling disconnect early in 2015.  In Q1, retail sales were 12% lower that production.  Although fleets were willing to place humongous orders in 2014Q4, they were not in a hurry to take delivery 4 to 6 months later.  Of course inventories shot up, but that was not thought to be a problem because the market was considered smoking hot (due to high orders and increased production) and trucks were expected to start flying off the dealer lots very soon.

But that never happened.  Retail sales exceeded production in only four months in 2015, and the total net difference for three of those months was a paltry 1,600 trucks.  Under normal conditions, inventories should have peaked in Q2 and then started a linear decline.  Instead, inventories kept right on climbing, peaking in October and falling a paltry 300 units in November.

It would appear fleets overestimated the amount of trucks they would need in the second half of the year.  This “over optimism” spilled over to the dealers, who stocked up in anticipation of increased sales throughout 2015. 

The huge order volumes in 2014Q4 were also driven by concerns of limited production capacity which caused fleets to issue “place holder” orders to secure future build slots in case they were needed.  Many of these orders were cancelled in 2015Q4.  It also appears fleets were more careful in bringing equipment into service after the Great Recession.  They placed big orders and brought the trucks into service more gradually, as needed, then stopped adding equipment when prudent.  All this adds up to another overbuild and record inventories.

Who Gets The Blame?

I don’t think you can blame anyone for the predicament this time.  The OEMs received massive orders and responded.  The fleets saw a strong freight market and the growing need for new equipment for the first time in several years, and displayed strong confidence in the market.  The dealers saw an opportunity for increased sales and thus responded accordingly. 

This is a very cyclical industry, in a free-market economy, driven by forces mostly outside its control, operating in a strong competitive environment. The OEMs competed strongly for all this new business, and this competition is key. It’s similar to being in a race that you are running hard to win, but you do not know where the finish line is.  Under these conditions, you are going to run too far every time.

Other Factors in Play

Unfortunately, this decrease in Class 8 cycle demand comes at a time when the manufacturing sector of the economy is faltering.  The ISM (purchasing managers) Index has been below 50 (indicates contraction) for two months, exports are weak, the energy industry is reeling, and business inventories are bloated.  Some economists are even claiming that we are in a manufacturing recession.  Of course this industrial weakness is pushing truck build down even more than expected.  Without these negative economic factors, maybe the “soft landing” scenario would have played out.

Bumps in the Road

Right now we are nervous because of the production cuts, layoffs, and declining orders.  However, December preliminary orders were almost 28,000, not too shabby in an average year.  Backlogs are still relatively healthy, but high inventories will remain a hindrance to future growth.  Once the smoke clears, the market should find the proper balance, and the runway should smooth out.  We will keep on rolling, just at a slower speed.

What About the Economy?

A drop in commercial equipment demand often precedes a decrease in GDP.  Trucks carry the bulk of freight in the U.S. so less trucks and trailers needed, means less economic growth.

The larger than expected decline in Class 8 truck demand may indicate weaker growth for 2016 compared to 2015.  However, the GDP will be better in Q1 than the previous two years, if this season’s mild winter continues.    
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, December 10, 2015

The Commercial Vehicle Market Cycles Down – Will the Economy Follow?

This economic recovery has most assuredly been slow and steady. Just look at GDP growth for the last 5 years:

2010 = 2.5%
2011 = 1.6%
2012 = 2.3%
2013 = 2.2%
2014 = 2.4%
2015 = 2.5%

Only 90 basis points of spread over a six-year period.  Of course there are fluctuations, but economic growth has exceeded 3% very few months during this time.  A free market is supposed to generate a business cycle, however the business cycle has been muted coming out of the Great Recession. Possible explanations for this include:

-         Recessions that damage the financial system, as the Great Recession did, take longer to recover from, and economic growth is restricted for an extended period of time.

-         The recession was so severe, businesses and consumers were very cautious in spending and investing. This lack of capital flowing into the economy has slowed growth.

-         The Great Recession made businesses risk averse.  Companies did not take chances that had the potential to generate big rewards; the type of gains that fuel GDP growth.

-         Interest rates have been held constant at an unnatural, 0%, rate.  In a free market economy, the cost of money should never be zero.

-         Quantitative easing – the government attempts to manage the economy, and thus dampens the natural cycle.

-         Government policies which limit economic growth.  The current administration greatly favors regulation over free market policies.  This flattens the cycles and restrains GDP.

However, despite all the complaints about a weak, sluggish recovery, the past six years have been very good for manufacturing. The slow, steady growth has provided companies with a more stable, predictable environment.  This enables producers to plan and schedule better, and to operate at peak efficiencies.  As long as sales are increasing, even moderately, costs get reduced due to the efficiencies and profits rise.

That is why corporate profits at manufacturing firms have been so healthy the last few years.  However, the combination of slow growth and risk aversion means companies try to maximize already existing resources.  This results in fewer new factories, new hires, and equipment purchases.  This, in turn,
impacts GDP and new job creation.  Corporations have been criticized for “sitting on profits,” but this behavior is highly rational under the current environment.  There is limited benefit to reinvestment, and the perceived risk still remains.

The Class 8 truck and heavy-duty trailer is known for its large business cycles.  This market is tremendous in good economic times, and horrible during recessions.  It would be expected that the stable GDP numbers would have smoothed out the industry cycle some this time.

Very interestingly, it appears this is not the case.  The commercial equipment market has continued to cycle up despite extended moderate economic growth.  The industry has been impacted by the slow recovery.  The sales gains in the early years of the recovery were modest, and this did extend the cycle.  For example, commercial trailers are experiencing their record sixth consecutive year of growth (5 years was the previous record).  However, the commercial vehicle industry has cycled very high, as it normally does, despite all the factors discussed previously.

The Class 8 market has been extremely hot, but has now begun to cool off.  Backlogs peaked in February, and builds peaked in May.  Orders over the last six months are down 35% year-over-year.  It was expected that the market would gradually decline into a “soft landing” and not collapse as in previous down cycles.  Because, of course, the economy is still growing, so the cycle should moderate, right?

However, preliminary Class 8 truck orders were alarmingly low for November, indicating that production is going to drop faster than anticipated, especially with inventories at record levels.  The normal down cycle may be in play despite a moderately growing economy.

Another consideration is that down cycles in the commercial vehicle markets often precede weakness in the general economy.  The good news is that the trailer market, while peaking, has not begun its down cycle quite yet.  Many economists believe that because the economy is not cycling up rapidly, the next recession, due sometime in the coming years, will not be that severe.  But let’s see how fast and how far the commercial vehicle market falls for clues on the general economy.

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 11, 2015

What We Have Here is a Failure to Participate

Last time I discussed why the “low” unemployment rate was no longer a reliable indicator of the labor situation in the U.S. Now, as the latest headlines trumpet, the official unemployment rate is dropping to 5%, wow 5%! What is currently wrong with the job market?

-         Not enough jobs are being created to absorb the number of people who want to work.

-         The jobs being created are not “quality” jobs. The wages and benefits are not equal to many of the jobs destroyed by the Great Recession.

-         There is a large, and growing, structural unemployment problem. The skills of the unemployed and underemployed are not a match for the “quality” jobs that are being created.

-         The labor participation rate fell rapidly as a result of the recession and has continued to decrease. Many people have left the workforce and are not currently seeking employment.

Because the labor participation rate directly impacts the unemployment rate and is the most important factor in this right now, it deserves closer examination. A problem with understanding the labor participation rate is that it has become highly politicized. Conservatives claim that all the people are leaving the workforce due to the horrible economy (or discouraged workers). Liberals claim all the people are leaving the workforce because all the baby boomers are hitting retirement age ( or demographics).

An economist at the recent FTR Freight Conference gave the most objective analysis I have heard. He said calculations show that two-thirds of the labor participation loss was due to demographics and one-third was due to discouraged workers.

The first thing to consider is this: even if only one-third of the increase is discouraged workers, it is still a significant number. At some point in a recovery, workers are supposed to reenter the job market as opportunities increase. This is not happening.

The second thing is: I would contend that the two-thirds due to demographics figure is probably overstated. Within the baby boomers, it is not just age that is a factor. During previous recessions, younger workers were laid off in greater number than older workers. The reasons were: seniority rules for union workers; employers not having to cut that deeply due to a less severe recession; and employers being loyal to workers who had worked many years at their companies.

The Great Recession changed all that. Many more of the older workers lost their jobs this time for the following reasons: the work force had become much more white-collar since the last bad recession, so older workers were not protected by seniority rules; the recession was so severe that many companies cut employees based on salary levels; older, more experienced workers had higher salaries, therefore they were cut in greater numbers; and, finally, the loyalty rules have changed in our culture. For years, businesses lamented the decrease in employee loyalty, and during the Great Recession the corporations stuck back.

After getting downsized, a significant number of older workers lacked skills, opportunities, or the desire to start over in a new job, so they have involuntarily retired, found a way to go on disability, or have just dropped out of the workforce and given up hope. These people get counted as “demographic,” but they are very discouraged and trapped by their circumstances.

Also, factor in the people who are working part-time beyond their retirement age because they are either bored or didn’t save enough for retirement. These people are increasing the participation rate not decreasing it, and doing so in the older age ranges. So what we have here is the 70-year old greeter at Walmart who is just relieving his boredom, offsetting the 60-year old person who needs to work but has given up hope. On paper it looks the same, one person doing one job, but the circumstances and consequences are extremely different.

In addition to these “older worker” and “demographic” factors, here are some other reasons for the lower labor participation rate:
This guy would like greater participation!

-         The Affordable Care Act enables more people to receive health insurance without having a job. This provides a disincentive to work that did not exist before.

-         The expansion of the safety net (food stamps, etc.) during the recession also provides a disincentive to work for some people.

-         There is a cultural change taking place reducing the traditional “work ethic” which was stronger in previous generations.

-         Skilled manual labor is not desired or valued by people or society as in times past. For example, trailer manufactures have had problems finding people who wanted to work in factory jobs the past two years.

-         The “quality” of jobs created in this recovery has been poor compared to the quality of the jobs destroyed in the Great Recession. There may not be sufficient motivation for someone who was displaced from a $50,000 white collar job or $40,000 blue collar job to take a retail or service position that pays half as much.

-         The significant “structural unemployment,” unemployed people not having the skills necessary to fill the job openings. This happens at the far ends of the age ranges. Older workers cast out from their long time jobs may lack the technical skills needed for new jobs. Younger workers have amassed huge college loan debt and do not have the skills (or desire) for the skilled manufacturing jobs that are available.

Add this all up, and you have a tremendously dysfunctional employment situation. The labor participation rate is alarmingly low. Economic growth is stuck on “low,” due to the lingering effects of the recession (both psychological and monetary) and government policies that restrict growth, not promote it. When explored in total context, is it any wonder the unemployment rate does not accurately describe the current situation?

Monday, October 19, 2015

The Unemployment Rate Data Is A Mess

I have mentioned numerous times how the impact of the Great Recession has messed with the accuracy of traditionally reliable economic indicators.  This is important because economists and forecasters rely heavily on these indicators to analyze the economy and develop forecasts.

Fortunately, most of the indicators have “reset” to some degree as the economy has returned to a more stable (maybe still not normal) state. It still can be difficult to use some of these depending how long and how badly the recent history was corrupted by the recession.

However, one indicator is still producing numbers that are unreliable and not very useful. It is the monthly unemployment rate percentage.

This is significant because it is one of the most important economic indicators we have.  Consider how the percentage of people employed impacts the other key indicators: GDP, retail sales, government spending, industrial production, etc.

It is also the economic indicator followed by the greatest number of people, and thus reported on most by the press.  Most people have at least some interest in the unemployment rate.  People are concerned with job security, wages, the general job market, etc., and the unemployment rate gives insight to all those factors.  In addition, it is expressed in a single percentage and is perceived to be a simple, understandable concept, although it really is not. 

When the Great Recession hit in full force, it took the unemployment rate from 4.6% (start of 2007) to 10.0% in October 2009, and the number of unemployed people from 7 million to 15 million.  The unemployment rate has steadily declined, as expected during a recovery, and is currently at 5.1%.

The problem is that over the last six years there have been structural and cultural changes to the “labor force” that have significantly impacted the unemployment rate.  Because the unemployment rate only includes people actively looking for work, the labor-force participation rate becomes very relevant.  Unemployment Rate = number of people unemployed and actively seeking work/labor force (employed people + the numerator).

At the start of 2007, the labor participation rate (percentage of the population working or wanting to work) was 66.4%, it is now 62.4%.  This is a significant decline and there are several reasons for it which I will explore in a subsequent post. However, most of the drop is due to aging baby boomers retiring.  All these changes happening in a very dynamic environment creates issues with the unemployment rate.

Prior to the Great Recession, a 5.1% unemployment rate would be an indication of:

-         A strong, vibrant economy
-         Steady wage growth
-         An expanding job market, with many opportunities
-         Many employees changing jobs to become upwardly mobile
-         Great entry level positions to absorb the new college graduates

In 2015 however, we have a 5.1% unemployment rate with what would be considered a lukewarm job market.  The headlines scream “Unemployment Rate Down to 5.1%,” and then the article goes on to explain why this is not indicative of the true labor market and how things are not as good as you might believe.  I am so tired of seeing those headlines and hearing those reports. They are now basically worthless, mere noise in a crowded news world.

People are quick to counter the basic employment rate (U3) with the supposedly better (U6) which seeks to include people working part-time for economic reasons and discouraged workers.  The U6 was 8.4% in 2007, spiking to 17.1% at peak, and is now down to 10%, but something tells me this measurement also does not carry the same weight as in the past.  I do not know it is measurement related, survey related or whatever, I don’t trust the number in historical perspective.

Therefore I consider the numbers unreliable; the only benefit we receive is the direction and the basis point difference.  We know that we have moved 490
The Unemployment rate is not even correct
twice a day!
basis points (according to a mathematical formula) during this recovery, but that’s about all we know. If this is the new normal, maybe the number will become relevant again in a few years.

There is an opportunity for some economic firm or university to try to develop a new employment index that would combine the government data, job growth numbers, help wanted numbers, wage growth, some new survey data, and any other relevant data available.  I think this could be a very useful tool to replace the old, worn-out, employment rate.

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, October 5, 2015

There Is No Rice Krispies Treat In The GDP

The U.S. economy registered a surprising 3.9% GDP growth in Q2 after eking out just a 0.6% gain in Q1.  Of course the extreme winter weather (for the second consecutive year) tanked Q1. I did not think there would be a strong snapback in Q2 based on the manufacturing data I analyzed. However, there was a significant snapback, here are some reasons for it:
  • Consumers delayed purchases
    Retail sales of products and services was impacted significantly by the harsh winter. People stayed hunkered down with their furnaces cranked for much of the first two months of the year.  New England was literally buried with snow for much of the quarter.  Consumers resumed consuming in Q2.  They bought stuff they would have bought in Q1. They also went out and spent the money they accumulated in Q1 while cocooning.  Consumer spending increased 3.1% in Q2.
  • Manufacturing was impacted
    There were some manufacturing disruptions, they just happened in other areas of the country this year versus last (the South and New England, instead of the Midwest).  These companies played catch up in Q2.  In addition, the bad weather caused orders to drop for other manufacturers, as demand waned in Q1.  These producers revved up the factories in Q2 in response to stronger demand and to replace inventories (but maybe too many inventories).
  • The Gas Price “Dividend” Finally Gets Spent
    Economists have been baffled because significantly lower gas prices have not caused a jump in retail sales. Consumers waited to see if prices would remain low.  They were not going to spend this extra money quickly when they thought that gas prices could spike right back up.  Now people are more confident in spending this money and it helped boost the Q2 numbers.  My Discretionary Spending Index has been strong since May.  The Restaurant Performance Index has been very strong all year (although it did fall in August).
  • The Employment Situation Continues To Improve
    The economy continues to create jobs, of course not enough. The unemployment percentage is low, of course it can’t be trusted.  Wages are growing, of course too slowly, but it is a net positive.  We have to assume there was a delay in hiring in Q1, so there was some pent-up labor demand filled in Q2.
Will This Economic Rally in Q2 Provide Momentum for the Rest of 2015?
To determine this, let’s review some of the forward-looking indicators:
  • Economic Indexes
    The ECRI (Economic Cycle Research Institute) Leading Growth Index has been sliding since June and went negative in August.  The Conference Board Index of Leading Economic Indicators slowed to “0” in July and was only 0.1 in August. Not good.
  • Manufacturing Data
    Factory Order data has been flat. New Orders (ISM) were holding up until July and then weakened in August and September. Backlogs (ISM) of course have fallen as a result. The Philadelphia FED Diffusion Index tanked big time in September. Thus the forecast is for slower manufacturing growth the rest of the year.  Also, not good.
  • Housing
    Some mixed signals here.  Builder Confidence is still higher than it’s been in many years and very positive. However, recent building permit numbers have not been that impressive.  Other housing statistics are better, but not consistent.  The overall economy has experienced a “choppy” recovery, why would we expect the housing recovery to be any better? So this is positive, but not very reliable.
  • Confidence Indexes
    Bloomberg’s Consumer Comfort Index is down slightly from earlier in the year, and the NFIB Small Business Optimism survey has been relatively flat at a moderate level for the past three months. Very neutral, if that is such a thing.
  • Other Factors
    The Chicago FED National Activity Index is close to “0” indicating current economic growth of around 2.3%.  The price of commodities has dropped to alarming levels.  So neutral, and negative.
  • The Trucking Industry
    FTR forecasts that freight growth will slow in Q4.  This is not surprising based on the manufacturing data listed previously.  The demand for new Class 8 trucks has weakened a bit recently, but remains healthy.  The demand for trailers remains robust, but should follow the Class 8 market at some point soon.  Good, but not great. 
Based on the indicators, the economy did not receive any “slingshot” momentum from the big Q2 GDP. It appears the economy has reverted back to its slow growth mode.  This is confirmed by some economists who say that the economy grew at a 2.2% annual rate in the first half of 2015.
The plate is empty this time!
The Wall Street Journal Survey of economists has Q3 at 2.0% and Q4 at 2.6%. Reportedly, inflated inventories will hinder Q3 some.  So there was a snapback, but there is no snap forward.  No extra positive momentum was generated by the strong performance of Q2.  Just as we should not have been concerned with the low GDP in Q1, there is no reason to be joyous about Q2.  There will be no Snap, Crackle, Pop! this time.
I now return you to your regularly scheduled economic programming. Nothing to see here.

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, September 3, 2015

Green Shoots, Green Shoots in the Housing Market!

In my last post, I stated how the green shoots that FED Chairman Ben Bernanke first trumpeted in March of 2009 were finally appearing in new hotel construction. However, while we were enjoying the summer, while we were lounging at the beach, while no one was paying attention, something wonderful has happened. Housing began its long awaited recovery.

I know you think I’m joking or maybe just making it up.  You’ve heard rumors and hopes of a housing recovery for the past four years.  So much so that you tuned out news on the subject, you’ve accepted the fools who proclaim this is the “new normal.”  But now there are green shoots in the housing market,
green shoots I proclaim!

Early in 2014 I told you not to believe the forecasts of an impending housing recovery, and I was correct. And now I’m saying it is here. Let’s check the numbers to see why.

Housing Starts:

July Report: 1.2M (annual rate). +0.2% vs. June, +10.1% y/y

Trend: We are finally moving up at a consistent, solid rate.  A healthy market now would be around 1.6 million starts.  We are not quite there, but at least we can see the target and it is in reach.  The forecasts for 2016 are still reserved; however, Wells Fargo is in at 1.25M and the Wall Street Journal economic panel is at 1.3M. If the rest of the economy cooperates, 1.3M or more is very plausible.

Building Permits

July Report 1.1M (annual rate). -16.3% vs. June +7.5% y/y

Trend: The July numbers were lower than expectations after a terrific June.  However, the trend is definitely positive and bodes well for increased builds in 2016.

Home Builder Confidence

August = 61, July = 60, August 2014 = 55

Trend: The August value is the highest since November 2005, and that says a lot. A reading of 50 is neutral, so builders are anticipating very good times ahead. 

New Home Sales

July Report: 507K (annual rate). +5.4% vs. June, +25.8 y/y

Trend: Very strong year-over-year and monthly growth.  Finally there is some momentum and reason to feel optimistic.  However, a healthy market is 700K and that still looks to be more than a year away.

Existing Home Sales:

July Report: 5.6M, +2.0% from June, +10.0 y/y

Again, there is finally some positive news after years of inconsistent, sluggish numbers.  The market is still far from healthy, far from normal, but it is moving consistently in the right direction.

Home Inventories

This is the one metric that is not positive.  Existing home inventories were actually down slightly in July and down 5% y/y.  This is confusing to economists, which means there is more than one factor causing this, and there are shifts in market forces which are never clear when they are still changing.  If this doesn’t improve soon, it will continue to constrain the market.
Housing Prices

Core Logic reports prices are up 6.5% m/m and 11.7% y/y in June. Of course this is a function of both increased demand and restricted supply (low inventory). Even so, prices are still 7.4% below the April 2006 peak.

Anecdotal Reports

A roofing contractor told me he is advising people to schedule him now because there will soon be a shortage of shingles due to a significant increase in new home construction.  It seems the manufactures were lulled into a false sense of security after years of sluggish sales and are now rushing to catch up with the rapidly growing demand.  This sounds like exactly what happened in the Class 8 truck and trailer markets as demand suddenly spiked in 2014 and a few years of stable sales.

My realtor friend, Nancy, also reports that instead of sunning herself at the beach during the traditional summer slowdown, she was very busy selling houses.  Her suntan will suffer, but her bank account is looking good.

The Outlook

There are still hurdles for the housing market to clear before it starts to hum.  Wages are not growing, so people are not moving up to bigger homes.  Millennials are not finding suitable jobs and forming households as before, both factors in low-end home sales.  Also, builders have not built enough smaller, starter, homes instead of the McMansions, which people either don’t desire or can’t afford. 

The housing market remains out of sync with the rest of the economy.  This means an economic recession could stop the housing recovery.  We don’t have much history on housing lagging the general economy, so this scenario is difficult to predict.

People are still risk adverse due to the Great Recession.  They are reluctant to take on a mortgage and are willing to pay higher rental costs to reduce their risk.  We, again, saw how the risk factor limited truck and trailer sales until 2014. 

However, we know what happened when the commercial vehicle market finally got over the hump and started to move.  There was a tremendous amount of pent-up demand, and, once that was released, the results were surprising. If this trend repeats in the housing market, 2016 will be a good year, and 2017 could be something special.  Keep an eye on those green shoots! 

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.)