Monday, March 20, 2017

Is the Gopher Moving From Caution to Confidence?

Economic calamities result in changes in micro-economic behavior which can last for years. My grandfather had accounts at eight different banks, just in case seven of the banks failed; my grandmother dutifully recycled her aluminum foil, 25 years after the Great Depression had ended. People fear that bad times might return, which causes them to be cautious for an extended time.

Likewise, the Great Recession (of course not nearly as traumatic as the Depression) ended only eight years ago and continues to impact micro-economic behavior and thus, macroeconomic performance. Exacerbating this impact was the weak, inconsistent recovery which followed.

Businesses and consumers emerged from our recent calamity exhibiting significant caution. Businesses witnessed customers and competitors getting washed away in the economic tumult. Almost everyone knew someone who had suffered a significant economic loss during this time. In recent, milder recessions the economy snapped back, and this short-term caution was replaced by renewed confidence, and economic behavior quickly reverted to pre-recession norms.

However, that has not happened, as of yet, this time. When you add in the cultural changes taking place due to the Millennials and new government policies over the last several years, the economic behavior changes are significant.

I initially resisted the idea of a “new normal” when this was suggested by some economists a few years ago. I argued that it was more like a “new abnormal,” which suggested that we would divert back to the “old normal” at some point. However, this transitional period has lasted too long, and too many factors have appeared for economic society to ever return to conditions of the mid-oughts.

This recovery period has been characterized by over-cautiousness and under-confidence. It is the Gopher Economy, with businesses and consumers sticking their heads up to move forward, then diving back under the ground at the first
sign of economic distress.

The high cautiousness combined with cultural and governmental factors have resulted in the following changes:

-         Home ownership percentages remain lower. It is much less risky to own a home than to rent. The recovery has not produced enough high paying jobs. Add in student loan debt, and Millennials cannot afford houses, are not getting married, not producing children, etc. These factors are muffling the housing recovery, which is usually a main driver of economic recovery.

-         Labor participation rates are down. The top end of the demographic scale got hit with huge layoffs during the recession. Older, displaced workers don’t have enough time to learn new skills, and they are much less likely to move to where new jobs are available. Some workers entered expanded disability programs, and some retired prematurely. On the other end, many Millennials have entered the workforce at a much lower level than expected, because the recovery has not produced ample opportunities. The government has expanded the “safety net,” which decreases incentive to work. In addition, some younger workers eschew manual labor positions, making it difficult for some manufacturers to fill open jobs. Not having these older and younger people in the workforce also hinders economic growth.

-         Millennials are less likely to own cars. Car loans equal debt risk, and caution works against this. High student loan debt and lower paying jobs limit the funds available for transportation. Uber and ride-services limit the need. The DOT Miles Driven measurement lagged for an extended period during the recovery, finally resuming a more normal growth rate in 2014.

-         Unemployed workers are much less motivated to move cross country to take jobs, because of the risk that the new job may also end. Cautious workers stay put. However, many Millennials are moving into the downtowns of large cities and saving money by sharing living expenses and reducing transportation costs. Now some jobs are being moved into the cities to attract these workers, so you actually have some jobs following the people, instead of the other way around.

-         Small businesses have been very reluctant to spend money on expansion or new equipment. The slow recovery and increased regulations have held profits modest. The inconsistency of the recovery has kept business owners cautious.

-         Banks have been more cautious in making loans. Requirements have tightened.

-         This economy lacks risk takers, entrepreneurs, new business start-ups, and new industries…the types of companies which create jobs.

Impact on the Transportation Equipment Markets

The biggest impact of the Gopher Economy has been on medium-duty work trucks, the types of vehicles used by many small service and construction businesses to transport their equipment, materials, and supplies. The market has grown modestly during the recovery, but much less than Class 8 trucks and trailers. Small businesses continue to manage their companies cautiously, avoiding risk, just in case the recession returns.

In December, I wrote about the boost in consumer and business confidence since the election. Many economists warned, at the time, that this was more of an emotional reaction and this confidence would soon fade; however, the opposite has occurred:

-         The Conference Board Consumer Confidence Index is up another 7.7 points since November.

-         The University of Michigan Index of Consumer Sentiment gained another 5.6 points from November.

-         The Gallup U.S. Economic Confidence Index jumps to +16, 8 points higher than November.

-         The National Federation of Independent Business is up 7.3 points since November, its highest level since 2004.

However, confidence surveys are traditionally unreliable predictors of future action (i.e. actually spending money). Still, the large increases in these indexes are hard to ignore. They would indicate the economy could be moving from caution to confidence, and this has very positive indications for future economic growth.

It took a world war to shock the economy out of its stupor after the Great Depression. Did it take a landmark election to shake the ground and cause this economy to emerge from its hole and start moving again?

  This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, February 20, 2017

Scoring Some Economic Touchdowns

The previews of the Super Bowl indicated it would be a very close game, between two evenly matched teams. These predictions turned out to be accurate as we witnessed the first overtime game in Super Bowl history. Based on the matchup, I also expected the score to be very close the entire game, with no team being able to dominate the game for very long.

Of course, that assumption was wrong, very wrong. The Falcons had the
momentum in the first half and built a big lead, however the Patriots had the overwhelming momentum in the second half. “Momentum” is an intriguing concept in sports; it can’t be seen, but the results are obvious.

For the first time in years, it appears this economy has some positive momentum. At the beginning of this long, slow recovery, the manufacturing sector produced the growth, while the consumer side was sluggish. 

Fortunately, just as manufacturing slowed, consumer activity increased. Now, the consumer sector is maintaining its progress, and manufacturing appears ready to regenerate after an extended rough patch.

I had warned in 2016 that the economy was entering a danger zone because Class 8 truck sales were dropping after a high peak, an indication of a future significant economic downturn. I said, if the economy made it past November without a recession, there was potential for stronger economic growth. The economy struggled in Q3, but made it through the danger zone basically unscathed. Now the Class 8 truck market is stabilizing, a very good sign for the economy in 2017.

A review of the key sectors:

Consumer: Retail sales were up 0.6% in December. The economy continues to create jobs at a steady pace. Personal income is rising. The consumer services sector also continues to do well. The National Retail Federation forecasts that sales could increase up to 4.2% this year.

Manufacturing: The ISM (Purchasing Manager Index): January’s reading is 56%, the highest since November 2014.

Housing: While nobody was paying attention due to the election and other news, the housing market had a solid 2016. Housing starts increased 4.9% over 2015, and that momentum is expected to continue entering this year.

Energy: The new OPEC agreement has increased and stabilized the price of crude. This has significantly increased domestic drilling and exploration. . Of course, it is not back at previous levels and is dependent on crude prices remaining somewhat stable.

Economic Indicator Indexes: Both the Conference Board – Index of Leading Economic Indicators and the Economic Cycle Research Institute – Weekly Growth Index are indicating increased economic growth in the next six months.

Commercial Vehicles and Freight: Class 8 truck orders have improved since October, and production is positioned for a moderate increase over the late-2016 slump. Commercial trailers have also stabilized after some expected market weakness the second half of 2016.

My Leading Economic Indicators: I track 17 forward-looking indicators. Back in August, 3 were positive, 5 were neutral, and 9 were negative. This translated into a 1.9% Q4 GDP. Currently, 10 are positive, 4 are neutral, and 3 are negative.

What About a Trump Bump? 

I do believe the election has had an impact, but not in the way most people believe. I contend that businesses (especially small businesses), and some consumers, held back spending in the three months prior to the election due the fearful uncertainty created by a caustic campaign. Once the election was over, this caution faded, spending resumed (with maybe some pent-up demand), and the economy got a boost.

While consumer and business confidence have risen significantly since the election, it will take time for this confidence to translate into actual dollars. However, this confidence can make a difference if it provides even a nudge to an already accelerating economy. It is important to note that all the indicators mentioned above were measurements taken before the transfer of power.

The Forecast

The Wall Street Journal Economist Panel average is for 2.2% GDP growth in Q1 and 2.4% in Q2. FTR (Freight Transportation Research) is at 2.7% and 2.3%.

The Call

This economy does have momentum. Will this produce some “economic touchdowns” in 2017? I like our chances based on the solid improvement of the forward-looking economic indicators, I think it’s possible to increase 100 basis points from the 1.9% of Q4 2016. Take the “over” on the predictions, and look for around 3% growth the first half of the year.

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, January 24, 2017

Flat Lines – Very Flat Lines

When the smoke began to clear from the economic crash known as the Great Recession, economists hoped for a V-shaped recovery. In a V-shaped recovery, the economy recedes but then snaps right back after the economic shock.  When the economy starts to revive, there is a big boost in business and consumer spending, leading to rapid job growth.  This spurt in activity is similar to people being cooped up after a long winter and then frolicking on the first warm day of spring.

At that time, some economists warned that recessions caused by shocks to the financial system, as was the case here, often take many years to recover from.  They cited Japan’s “Lost Decade” as an example.   More optimistic economists rejected this argument, saying the U.S. economy was much studier than Japan’s and would bounce back much quicker.

Many other economists predicted a U-shaped recovery.  In the U-shaped recovery, the economy recedes, stays sluggish for some time, and then begins a strong recovery. 

Well, we definitely didn’t get a “V,” and we couldn’t get a “U,” either.  Unfortunately, the freight sector did suffer a “lost decade” in that it took ten years for freight levels to match pre-recession highs. Manufacturing employment also has not yet recovered, but automation and globalization have also restricted this number during the time period, so comparisons are difficult.

So, what do we call this long, slow slog of a recovery?  I propose labeling it the “Division Bar Recovery” because graphically there is a slanted vertical line with a long horizontal line attached to the right of it. This represents the economy making a small recovery then flat-lining for an extended period.

Analyze this!
This concept of a long, flat line (let’s say around 2% GDP growth) is intriguing.  Sure, there have been some ups and downs from quarter to quarter, but, get far away enough from the graph and look at it in its historical context, it’s a flat line.  This means economists have been trying to analyze a flat line for around five years! 

Data is collected, analyzed, graphed, and trended. We want to see trends and get paid to see trends, so therefore, we do see and report on trends. Thus, the economic growth line is studied intently and minutely, and this leads to:

“Whoa, the line is going up! Something good is happening.”

“Warning, the line was going up, but now it’s going down! It might not stop.”

“The line went up, then it went down, and now it’s back to the middle. It is not expected to go up, unless it goes back down.”

Frankly, you can’t fault economists for doing this.  To quote a popular television commercial, “If you’re an economist, you analyze data, it’s what you do.” Economists have had to deal with a unique economic environment, combined with broken, unreliable economic indicators. This has made forecasting anything even more challenging than normal.

However, even though the economy has not cycled much, the Class 8 truck market has continued to cycle as in the past, with a high peak in 2015, and a reasonable bottom (down around 35%) expected in 2017.  How this happened is still a mystery.  If you would have asked me a few years ago if the truck market could still cycle if the general economy didn’t, I could have given you at least five reasons why it would never happen. But, of course, it just did. I’m sure analysts in other industries are dealing with their own anomalies.

In addition, historically, the demand for commercial trailers was highly correlated with Class 8 trucks as is highly logical.  Except that in Q3 2015, demand for trailers stayed strong while Class 8 demand began to plummet.  The primary reason for this is Dry Van use was so low during the Great Recession, old units were not replaced, that many trailers were inactive for an extended time which altered the trade cycle.  This resulted in a huge pent-up demand for van trailers, which has continued to prop up sales.  We see similar pent-up demand in the auto market, because cars are being driven longer due to the Great Recession and the subsequent weak recovery. It messed up the trade-in cycles here, also. What happens in these two markets when the pent-up demand runs out? No one really knows, because there is no trend data to go by and it is difficult to accurately measure pent-up demand.  Auto sales are forecast to fall 5% this year, and Dry Vans to drop 15% (FTR forecasts).

Tracking this economic recovery is like watching a movie that has no plot. Sure, lots of stuff happens, but it is all unrelated.  The action goes nowhere. You end up totally confused by what’s happening and are highly uncertain about what will happen next.

Economists remain perplexed in this environment. If you look back over the past several years, you see a straight line. If you look at the current conditions, you see no trends. There are no discernible factors which will change current conditions in the short-term.  Therefore, your forecast must be…wait for it…a straight line.

If the economy were a person, he suffered a major trauma during the recession, started to recover, and then went into a coma.  He has flat-lined at a certain level, but his vitals are good. He is not dying, yet he is not thriving either.  An “economic coma” is a good description for the past several years.

Now there is a new physician, Dr. Trump, proposing to inject the patient with a new drug: a mixture of new and old chemicals. Will the patient come out of the coma and start to thrive? Will the injection make the patient ill? Will the medicine have any effect, or will the coma continue?  All of a sudden, this movie has a plot, with heightened drama and some tension. Stay tuned.  
 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, December 26, 2016

A Shot of Confidence

There has been a surge in consumer confidence since the election:

-         The Conference Board Consumer Confidence Index jumped 6 points from October to November.

-         The University of Michigan Index of Consumer Sentiment gained 5.6 points from October to November. Note: There was another 4.4 gain in December, taking the index to its highest reading since 2004.

-         The Gallup U.S. Economic Confidence Index is skyrocketing – reaching a nine-year high of +8, versus a reading of -11 before the election. According to Gallup, the index has “been below zero nearly continuously since 2008.”

Likewise, there is heightened optimism in the business community:

-         The stock market (DJI) is up more than 8% since the election.

-         Some economists are predicting consecutive quarters of 4% GDP growth before too long.

-         The OECD (Organization for Economic Co-operation and Development) says the growth rate of the economy will double by 2018. 

Non-Economic Factors in Play

So what is going on here?  There are several psychological and cultural factors that are impacting these occurrences: 

-         The Halo Effect

This says that people project their positive feelings about one aspect of a person onto many other traits regarding that person.  In this case, if the winner of the election is perceived as intelligent, competent, and/or capable, then there is a belief that his policies will be likewise.  (There is a reverse-halo effect too, as you may have read.)

-         The Winner Effect

General George Patton once said, “Americans love a winner and will not tolerate a loser.”  Our culture puts a high value on winning.  That’s why we are so sports-crazed, and why losing candidates have problems running again and winning.  This time we have a very vocal winner espousing a “winning” message, creating increased optimism.

-         The Sticker Effect

(This one I made up, and it is related to the Halo Effect and the Winner Effect.)  A person will project onto a winning candidate all the positive things the person believes in and wants accomplished.  “This elected official believes in the same things I do and will be able to change things the way I want them changed.”  There can also be negative stickers. “This elected official is against everything I believe in and will make everything much worse.”   

Other Factors

-         We have just completed the longest, roughest, and wildest campaign of our lifetimes.  Some people are feeling better about things because the election is over and there is less uncertainty.  This would have happened to some degree regardless of the outcome. 

-         President-elect Trump has more business experience than any POTUS in history.  Many (including some economists) are expecting that experience to translate into a much stronger economy.  It must be remembered, this result is not guaranteed.  We are in new territory here, and the economy is never that easily controlled.  Regardless, the new administration can be categorized as “pro-business”

A Pseudo-Economic Factor

-         Animal Spirits

This is a John Maynard Keyes term for when economic decisions are made instinctively or emotionally.  It is often used when economists lack a rational or standard explanation of what’s happening in the economy or stock market.  Apparently some positive animal spirits have been stirred by this election.

What About Business Confidence?

I expect the new surveys on business confidence to show significant increases also, for the same reasons listed above.  However, due to the sticker effect, when the president-elect talks about reducing regulations, many business people hear this: “All the regulations I don’t like will be repealed, and all pending regulations will be cancelled.”

Existing business regulations that inhibit business competiveness and efficiency are vulnerable for elimination.  Those dealing with safety factors are more likely to survive.  Environmental regulations will be subject to review.  I would expect all pending regulations to be put on hold and then reexamined.

The Impact on the Trucking Industry Regulations

Expect all pending regulations to be put on hold pending further review.  However, regulations involving safety factors will probably be enacted in some form after review.  Regulations that limit the ability to compete, or be efficient, may get dropped or changed.  The Electronic-Log-Device probably moves ahead since implementation has already started, it is a safety rule, and it does not implement a new standard, it merely uses technology to insure better compliance with a current standard.

What Happens to The Economy in 2017?

President-elect Trump’s economic plan was regarded as average at best, and disastrous at worst, during the campaign.  Now, some economists believe it is brilliant. Of course, it is not as bad as described in the past, and probably not as good as the confidence factors indicate now. In addition, it will take some time for the plan, if it works, to have a real positive impact.

Will consumers and businesses translate the current euphoria into greater economic growth? Are we entering into another “Era of Good Feeling”? A positive shot of confidence can influence consumer and business behavior, but we have not been in this situation since Hoover was elected in 1928 and the economy can be a very fickle thing.

Currently, the economy is sending very mixed messages.  The big-picture, macro, numbers have been looking good.  However, the on-the-ground view in Ohio is flashing warning signs.  There have been announcements of plant closings and layoffs. Tax revenue for Ohio in November (a real, not estimated, figure) was 5% under estimates. Numbers like that usually happen during recessions.  Present conditions are starting to remind me a little of December 2008.  Hold on econo-fans, this could be a wild 2017.

 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, December 6, 2016

Time to Make More Than Just Donuts

I have good economic news! A national chain has built a brand new facility just north of my local “economic warzone” (an area near me devastated by the Great Recession and now regressing after making a modest recovery).

Yes, a state-of-the-art donut store will soon open on a corner lot, near a relatively new exit off the interstate.  It does seem like an odd location for a donut shop.  The interchange is between two nearby exits.  It was constructed to alleviate future congestion at the airport exit to the north, provided the airport experiences significant growth.  The new exit has created some retail activity, but traffic along the corridor is still modest. Other than the expressway, there just isn’t much there.  I will assume the company completed a valid traffic study and the business is viable.

While some of the sales will come from existing local donut and coffee vendors, to be successful it will have to sell more donuts.  But do we really need more donuts?  Look at the obesity and health data; heck, just look around at people.  We do not need any more donuts.  And there also is the issue with selling scalding hot coffee to people just before they enter a jammed expressway on their morning commute.

Now this donut shop will create jobs, there is a huge sign out in front advertising the big recruitment/interview dates.  It may be difficult to recruit workers during the Christmas shopping season since retail sales are still strong in the region, and with statistical unemployment near the national average.

These, however, are low-wage jobs.  The types of jobs that politicians rail against because they do not pay a living wage.  But no one is forcing people to take the jobs, and the people working them will be happy to get them.  You could pay a minimum wage of $15/hour for these jobs; however, it should be noted that the skills necessary to bake small cakes and sell them are possessed by numerous merchants in Central Africa.  Fortunately, fresh donuts cannot be imported and neither can the workers, since our eastern border is much less porous than the southern one.

Even then, it appears this could just be another job tradeoff.  A local metal working factory is closing, reportedly due to increased competition from Mexico.  This is emblematic of the economic recovery after the Great Recession, high-end manufacturing and professional jobs, being replaced by retail and service jobs.  On paper, it looks like an even swap.  To a guy who just lost his 30-year factory job, however, it looks like it’s time to make the donuts.  

The donut shop also highlights the issues with income distribution.  Our society is having problems responding to cultural changes regarding the wage gap.  The recovery has been good for people who have jobs, but stubbornly terrible for those who don’t. Well-to-do suburbanites will now be spending some of their disposable income on pleasure food and expensive coffee, prepared by people making minimum wage, some of whom need better, full-time jobs if they could find one. And then there are people just ten miles away who don’t have basic food to eat.  I’m not making a judgement, I do like donuts, but the big picture isn’t that pretty.

Such is life in the Donut Recovery. This economic recovery has been soft and doughy, with a large hole right in the middle.  Yes, at times it is sweet, but it is loaded with many empty calories.  Too many donuts in this “Donut Recovery” have resulted in us becoming fat, dumb, and happy…or bloated, disinterested, and content with the status quo.

Alas, things remain distressed in that “economic war zone.” “For Lease” signs still line the roads, and no one is moving in.  That brand-new office building, about which I previously wrote, still does not have even one tenant. Unless something happens soon, the owner will have gone “zero-for-2016.”  Too bad, office workers there could have bought some coffee and donuts at the new shop.

In this mega game of “Dollars to Donuts,” the donuts keep winning.

 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, November 14, 2016

Did You Just Miss That Recession?

Back in March I wrote that the U.S. commercial vehicle market was signaling that a recession would begin sometime between July and November of this year.  The commercial vehicle market is usually a superb leading economic indicator because changes in freight growth first show up in how much new equipment is needed to haul these goods.

But here it is November, and the current economic data indicates an upturn, not a downturn, in the economy.  Why isn’t the commercial vehicle market a reliable indicator this time? I’m not sure, but it’s certainly not alone.

I realized this as I studied a chart on year-over-year change in employment growth (total employment by month) published by  It makes sense than when increases in employment start to slow, then the economy will stop growing at some point.  The concept is similar to commercial vehicles, less total trucks needed to haul diminishing freight, less total employees needed to do diminishing work.  It has been a fairly reliable predictor of past recessions, but not this time.

More enlightening is to review (Google) the headlines predicting recession this year:

February – Recession – It’s Already Started

March – Economy Already In Recession

May – It’s Undeniable – The Recession Is Already Here

June – The Next Recession Is Already Here

August – This Graph Says It All – The Recession Is Here

August – Historical Data Will Show That U.S. Was In Recession

September – U.S. May Now Be In A Recession

September – The U.S. Economy Is In A Recession

September – The U.S. Economy Is Coming Out Of Recession.

November – We Are Currently In Recession (This one was an analyst on a cable business program)

All of these analyses were based on current graphs, indices, models, and whatever, and certainly based on past trends.  And according to current GDP data, these predictions are:



Wrong – deniable


Wrong – probably

Wrong – bad graph

Wrong - probably

Interesting, since we officially weren’t in recession

And probably wrong, but it’s too early to tell.

So, predicting a recession is difficult, even more difficult than picking the winner of a big election.  Forecasting a recession under the current economic conditions is nearly impossible, and any analyst who correctly predicts the next one is probably more lucky than good.  Some traditional economic indicators remain broken, inconsistent, and in many cases, unusable.  These remain abnormal economic times. 

But still, it is odd for all these economist and analysts (and the commercial vehicle markets) to all be wrong.  Could something else be happening here?  Perhaps under these highly stimulated, highly controlled, not yet fully recovered from the Great Recession conditions, this is what an economic downturn looks like.  You can’t call it a recession, because GDP is not negative for two quarters, but it is an “extended low growth dip.”  That doesn’t roll off the tongue, maybe try ELGD.  It’s not difficult to spot it on the graph:

Did regulation and controls prevent the economy from going into recession?  Well, communist economies don’t go into recession very often because of the strict government controls, so yes comrades, this may be the answer.  That would indicate the largest free-market economy is struggling to achieve 2% growth while the largest communist economy is running up consecutive growth scores of 7.6%, 7.6%, and, yes, 7.6%.  (Note to the Chinese government: It looks very suspicious to repeat the same GDP % three times in a row.  It looks like your economist took a long vacation or that you are just making the numbers up.  If one of my analyses came up the same number three times in a row, I would employ the technique made famous by the noted economist Reginald Fudgit and round one of the numbers up and another one down.)

Therefore, maybe we had a recession and everyone missed it!  If so, we are out of it now, because Q3 GDP is currently estimated to be 2.9%.  Suddenly the guy who said the recession, or maybe now the ELGD, ended in September doesn’t sound so wacky now, does he?

Whoo Hooo! We just had a recession so mild that no one even noticed it! There were no mass layoffs, employment even increased, and the stock market didn’t tank! On the other hand, there will be no great snapback to high growth, because there is nothing to snap back to. The economy is expected to float back to around the 2% growth level. Oh boy!

The bottom line is, this economy is so docile that we can’t even have a decent recession.  There is not enough air in the economy to produce a bubble worthy of being burst.  However, about half of Americans just indicated they were not satisfied with the status quo.  Soon there will be a new economic sheriff in town. I heard he has some business experience, so we will see what happens next.

 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, October 13, 2016

The Economy Is Quiet – Much Too Quiet

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

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

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

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

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

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

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

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

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

 This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)