Monday, April 16, 2018

Let The Good Times Roll – For at least two more years


GDP is high, and unemployment is low.  Manufacturing is booming, and wages are rising. So, everyone is joyous, correct?  Of course not, you are starting to see articles claiming that if things are this good, a recession must be coming soon.

So it is time to again consider what the truck equipment markets indicate about the timing of the next recession.  In March 2016, I warned that based on historical correlations, the decline in Class 8 truck builds foretold a recession beginning in Q4 2016.  This did not happen due to the following factors:

-         The Class 8 truck market ended up suffering a correction, but not a crash.  Typically when sales start to slide, they keep plunging.  Fortunately this time, they bottomed out in Q1 2017 and began a steady recovery which continues today.  It is important to note that the FTR (Freight Transportation Research) models in mid-2016 showed the market correcting but not crashing.  That’s why our forecasts were much more accurate than all those other one’s which predicted a market crash.

-         GDP for Q4 2016 and Q1 2017 were 1.8% and 1.2% respectively.  While not a recession, the “economic plane” did dip close to the ground before pulling out of the dive.

-         Although the economy had failed to cycle much since 2010, the Class 8 truck market continued to cycle through the period. The substantial difference being that truck demand didn’t cycle as much as in the past (a good thing), which is the difference between having GDP quarters of 1.8% and 1.2% growth versus a recession.

The U.S. economy has been expanding for over eight and a half years; the third longest period since World War II.  But this recovery has been characterized by its slow, plodding growth and muted cycles.

The Good News: The economy is finally experiencing significant growth again.

The Bad News: The economy is finally experiencing significant growth again.

If we cycle way up, eventually the economy overheats and cycles down causing a recession.  But it is even more difficult to predict the timing of the next recession under the current unusual environment. If the Trump administration’s economic initiatives work, then giddyap, we are going to ride this wave for a while.  If this upcycle is the result of the restoration of normal economic fluctuations or in the trade strategies fail, we are quickly coming to an economic peak.

And this may be a return to the “old normal”. I believe that the slow, abnormal economic growth of the past several years was the result of restrictive government policies and businesses being too cautious and fearful after the Great Recession.  President Trump has loosened those restrictions and business and consumer confidence is soaring for whatever reasons.  This may be just a huge economic reset that took eight years to accomplish after the crash.

What Do The Equipment Markets Indicate Now?

It is important to watch the truck and trailer markets because they are leading indicators of the general economy.  Class 8 truck sales is one of the key economic leading indicators tracked by the economists at General Motors.

The Good News: The equipment markets and the economy appear to back in sync.

The Bad News: The equipment markets and the economy appear to back in sync.

As previously mentioned, the equipment markets continued to cycle even though the economy did not change much.  However, now the economy is vibrant, and it is pushing equipment sales to record levels (if you factor out the Class 8 pre-buy factor in 2006).  This is good in that it shows the economy is healthy and getting back to performing “normally”.  It is bad in that the equipment market, driven higher and hotter, will probably experience a perilous drop before and during the next economic downcycle. This type of drop is inherent in truck and trailer equipment and cannot be avoided.

Because of the significant impact of a recession on truck and trailer demand, FTR cannot put a recession factor in the forecast.  For example, in we forecast a recession for 2020, it would drive our equipment forecast way down that year.  But if the recession occurs in 2021, then the forecast for both those years would be highly inaccurate.  So the assumption for the forecasts is for no recession, even as the possibility increases due to the length of this recovery and the surging economy.  If the “master” economists cannot predict the timing of the next recession – than neither can we.

When Is The Next Danger Zone?

Based on history, which doesn’t always repeat and forecasts, which can be inaccurate in the long-term, when do the equipment markets indicate a recession could begin?

If truck/trailer production peaks around June 2019 (the current forecast), and recessions occur 13-18 months after that (based on history), the “danger zone” would be July-December 2020, which is as good as anyone’s forecast right now.  The good news is unless there is an economic or geopolitical shock, we
don’t have to worry about a recession for the next two years.  The bad news is if the economy accelerates the next two years, the eventual downturn is going to hurt.

So, let the good times roll – for now. 

 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, March 26, 2018

How the Trucking Capacity Crisis was Born


The U.S. trucking industry is experiencing a capacity crisis, with insufficient numbers of trucks and trailers to haul an ever-increasing amount of freight. FTR’s (Freight Transportation Research) measurement of Total Truck Utilization is currently at 97% (meaning 97% of all trucks are in use). The index is expected to hit 100% later this year. While it is an impossibility for 100% of trucks to be hauling freight, it indicates extreme capacity
constraints in the industry, causing major disruptions for both fleets and shippers. Shippers are having problems to haul their loads and are paying much higher freight rates.

So how did we get into this mess? Well, you can blame the Great Recession. Throughout the oughts, fleets managed their capacity more loosely, maintaining a certain amount of “flex capacity” to handle peak freight periods and not caring much when this excess capacity was idle. This strategy worked well in that era, when freight continued to shoot upward fueled by the housing bubble. Staying ahead of a fast-paced game was profitable.

But then the bubble burst. Most large fleets had enough capitalization to survive. Middle-sized fleets that managed their assets well also lived, but over-aggressive ones and smaller fleets got slaughtered. There were approximately 5,500 fleet bankruptcies in 2008, another 2,200 in 2009, and still a considerable number in 2010. By 2012, an astounding 18% of trucking capacity had been removed from the system.

The long, slow economic recovery that began in 2010 did not pressure the industry to promptly replace the lost capacity. Fleets were able to put trucks back into service at a measured pace. The trucking industry, as well as many sectors of the economy, benefitted from the sluggish recovery because growth was easier to manage, and profits grew.

Fleets were also very cautious after seeing many competitors fold during and after the Great Recession. Businesses, overall, were more cautious, a key proponent of the long, slow recovery. Large fleets managed their capacity more conservatively. Medium-sized fleets strove to be lean, efficient operations. The result was a significant reduction in “flex capacity.” This was very logical under the circumstances, and extra capacity was rarely needed in the slow-growth environment.

Capacity utilization reached the normal range in mid-2013, signaling the industry and the economy were regaining strength. Utilization percentages were fairly stable for a few years, except for a blip due to the Hours-of-Service regulations in late-2014. However, the utilization rate began a definite upward climb in mid-2016 and accelerated through 2017.

During an FTR forecasting meeting in January 2017, our updated capacity utilization forecast graph appeared on the screen. There was stunned silence … and then someone said:

“If this is correct, we’re headed for a severe capacity crunch early next year.”

Our model predicted that accelerated freight growth would combine with productivity-limiting ELD implementation, to push the capacity utilization percentage to near 100% in 2018. Based on this, we began to warn our customers about the “possibility” of a capacity crunch. The expected rise in utilization was a main reason the 2018 FTR equipment forecasts were much higher than other forecasts for almost all of last year.

And then the surge in business confidence after the election started to turn into real dollars. The roll-back of regulations provided more economic impetus. Manufacturing activity revived, and the freight forecasts kept increasing. Now throw in some tax reform. The same forecast graph that caused the commotion 14 months ago appears even more ominous now.

The flatbed fleets saw the surge beginning last May and began to ramp up capacity. Spot market rates started to shoot up last March, flattened out in the second half of 2017, and then spiked at year’s end.

In September, we began hearing complaints from some large shippers that couldn’t find trucks to haul their freight. They had contracts but not trucks. This forced them into the spot market, resulting in higher freight costs and increased late deliveries. The frustrated logistics managers had to explain why the company was paying higher prices for reduced customer service.

But many fleets remained cautious in responding to the capacity crisis. Some people questioned our optimistic 2018 equipment forecasts as late as October, explaining the fleets were not showing any urgency in placing orders for 2018.

However, this was to be expected. It took over ten years for freight volumes to recover after the Great Recession, and fleets had learned to manage their capacity well over that time. It’s difficult to change what is working well. For the industry as a whole, it’s like filling a big barrel with a hose delivering a slow, steady stream. It takes a long time to fill the barrel, and you get bored waiting for it to top out. Just when you are near the top (which you can’t really see), the water pressure increases and now you have an overflow you are not ready for – and a mess.

Now orders for trucks and trailers are pouring in, OEMs are increasing rates, and we all hope that fleets can find drivers for the new trucks they hope to put into service. It’s a mad scramble: shippers trying to find trucks to efficiently move goods, and truckers trying to supply those trucks. And if it can’t be done, economic growth will suffer.



Monday, February 12, 2018

How A Sea Change Happens

A sea change happens one drop at a time …


Problems at the Mall

I make my annual Christmas shopping trip to the mall around December 10 every year. For at least the last ten years, I have purchased calendars at a kiosk in the mall. I usually buy at least four calendars: a 365-day desk calendar for me, another desk calendar for my youngest daughter, and a desk calendar and wall calendar for my oldest daughter.

The calendars for my youngest daughter and I vary in theme every year depending on what is available and what I bought last year. However, I always buy my oldest daughter both a Pittsburgh Steeler desk calendar and wall calendar every year. How I happened to spawn a rabid Steelers fan while living in Northeast Ohio is another story. I know I am very much a pattern shopper, but my routine is relevant to the rest of this story.

About five years ago I was surprised when the calendar kiosk moved to a much less prominent location in the mall. I reasoned that the mall had raised rental fees and the company had decided to change locations rather than pay the higher cost. The new location must have cut into sales too much, because the next year the calendar kiosk was back at its previous location, although it was slightly smaller. Then each subsequent year, it was scaled back some more. This made business sense as fewer people were going to the mall, due to on-line shopping and competition from superstores. As sales decreased at the kiosk, costs were lowered by reducing the rental space.

This reduction in calendar selection did cause some issues for me. It became more difficult to find calendar themes I wanted. This year, the kiosk was about half the size it was five years ago. They took the board/card game kiosk that always stood next to it and combined it with the calendars into one kiosk, about the size of the original calendar kiosk. I was immediately concerned about finding desirable desk calendars for my daughter and myself, but I fortunately found two good ones. However, the number of sports team calendars had been greatly reduced, and there were no Pittsburgh Steeler calendars.

The sales clerk said they had sold out of those because it was a popular calendar this year. Of course, based on my many years of experience buying calendars at this kiosk, I knew this was not true. They didn’t have the calendars this year because they had significantly cut inventory. I paid for my two calendars and drove home thinking about how I could get the Steelers calendars before Christmas.

Ten minutes after returning home I logged on to calendars.com. I quickly found my Steeler calendars and, surprisingly, they were both $5 cheaper than what I usually pay at the kiosk, and shipping was free. I also noticed the wide variety of desk calendars they offer; my guess is at least 10 times more calendars than the kiosk. The calendars arrived in eight days, and everyone had a Merry Christmas.

Now where do you think I’m going to buy all my calendars next year? Multiply this change in my buying behavior by millions of purchases, and it explains the already enormous growth in on-line sales and suggests it will continue. Now this wasn’t my first on-line purchase, that happened in 1999. I remember it because my co-worker Kurt congratulated me on having the courage to submit my credit card number on-line. Of course, there are still issues. I ordered something this summer from a Facebook ad and the bogus company failed to send the merchandise, and also hacked my credit card number. Overall, for many items, on-line purchasing is superior to in-store shopping.

The World Gets Smaller and the Supply Chain Shorter

My most interesting gift this Christmas was a pair of sneakers I customer-ordered from China. The shoes were ordered from another Facebook ad (I guess I’m a gambler). What makes the shoes special is that they feature the name and logo of my alma mater, The University of Akron. Instead of stocking inventory of assorted sizes of the hundred or so universities (assuming) available, they only need to stock the shoe “shell” and then print the graphics on fabric and glue it to the shell. So, through the magic of the Internet, I can custom order Chinese-made goods. I would be very interested to see the actual factory where my shoes were made.

I ordered the shoes just after Thanksgiving, and they arrived one week later
than promised (they got delayed in customs according to the package tracking they provided) but got here four days before Christmas. My wife loved the gift! (not easy to please), and I got a pair for myself. However, I don’t think the logos and images are licensed, so technically I am wearing illegal shoes to the Akron U basketball games. I have not been arrested yet.

The Sea Change For Transportation

Huge selections and free shipping. Ordering customer-made goods from Chinese factories. These are the drops that are fueling this sea change. And just when you thought this movement was containable, 3-D printing is only beginning. More ships are about to be capsized, with the changes to transportation and logistics again inevitable.



Tuesday, January 16, 2018

Christmas Lights Shine for a Bright Economy

An unusual economic indicator that I track is “Outdoor Christmas Lights” (OCLs). OCLs are a coincidental economic indicator, providing information about the current state of the economy. This indicator is only relevant when the economy is getting weaker or growing stronger, and its measurement is highly subjective – more observational than measurable. Also, it is only able to be observed for a few weeks each year. 


I believe OCL purchase/usage is a unique economic behavior because it combines a variety of factors:

-         It is a purely discretionary purchase at a time of the year when discretionary money is limited due to gift buying.

-         It involves an expense of time to purchase the lights/decorations.

-         It involves an additional time investment to install the lights. However, this investment may not be as extensive due the increased use of the new projection lights.

-         It also requires an additional cost of electricity to power the lights. Another discretionary expense.

-         People tend to display OCLs for self-enjoyment and can be a reflection of their overall mood. A large number of people display OCLs as part of their annual Christmas festivities, while a significant number may be influenced by how festive they are feeling in a given year.

-         The use also creates positive economic externalities in that other people get to enjoy the OCLs. The huge displays some people employ are done mainly for the external benefits they produce. There is also a group dynamic in play within neighborhoods where everyone receives benefits from everyone else’s displays.

Therefore, this is economic behavior that requires an initial purchase, a physical investment, an ongoing economic investment done for personal/family mood enhancement, with an external benefit to both neighbors and strangers. This is a unique situation which has broader economic indications.

My Observation

I have lived in the same neighborhood for over 20 years and have observed (not measured) OCL usage over this time period. I admit it is only one extended neighborhood (five allotments), but it is in Stark County, Ohio, a much-watched “bell-weather” county in presidential elections.

During 2003-2007, OCL usage steadily increased. In 2007, the economy was booming and OCL usage peaked. After the recession hit, OCL displays plummeted for a few years. Then, like the economy,  they increased gradually from 2012 to 2016. The displays in 2016 were much more prominent than 2012, but still not up to 2007 levels.

Which brings us to 2017. What I just observed was an unprecedented level of OCL usage.  All occupied houses on my street had displays, and this is on a scarcely-traveled cul-de-sac. There was a high percentage of participation in the other four neighborhoods as well.

What It Means

The economy may be even stronger than what some of the other indicators say. This also confirms the higher consumer confidence/sentiment numbers released recently. Look for final Christmas retail sales numbers to exceed the forecasts. People are feeling good about their situation and the economy. There is economic momentum continuing into 2018.




Friday, December 29, 2017

How the "Trump Bump" Impacted Trucking

Note: This content first appeared in Global Trailer Magazine and was written for a foreign audience.  However, it does give a broad overview of the factors that have influenced commercial vehicle sales this year.

The unexpected election of Donald Trump has caused a great deal of political turmoil in the United States. However, the area of Trump’s biggest success has been the business sector, where a rejuvenated economy has boosted freight growth and commercial vehicle sales.

Although there have been few new laws passed, President Trump has been able to influence the economy in other ways. His impact, which is partially symbolic on the economy, trucking, and equipment purchases has been significant.

The Economy

A Shot of Confidence

Following the election, consumer and business confidence indexes spiked. Many of these measurements hit levels not achieved in many years, a couple reached all-time highs. Executives and citizens clearly expected a “businessman president” to be able to improve the economy.

However, business confidence surveys have been traditionally poor economic indicators because they measure attitude, not action (actually spending money). For this reason, many economists dismissed the indexes as a short-term emotional response. However, one of the factors stifling the U.S. economic recovery was fear. Many businesses barely survived the Great Recession and watched competitors go bankrupt. This caused companies to be extremely cautious about investing even years after the recession ended. Therefore, this increase is confidence factor did matter, but it took over half a year to have an impact. Although down from peak levels, most of the confidence indexes remain at elevated levels.

Regulations

The previous administration enacted and proposed numerous regulations upon business entities and industries, including trucking. It was perceived as an anti-business environment. Trump campaigned strongly against “over-regulation” and, in the first six months as president, cut or delayed over 800 regulations.

Gridlock

The U.S. Government is in a highly dysfunctional state. Although the Republicans hold the Senate, the House of Representatives, and the Presidency, they have not been able to pass any important legislation. This “government gridlock” has traditionally created a favorable business environment. U.S. companies desire the stable environment conditions when the government is idle. This leads to increased business investment, which creates jobs and economic growth.

Manufacturing

U.S. manufacturing growth also accelerated around mid-year. This was not primarily because of Trump, but of this business cycle. Manufacturing activity slumped late in 2016, impacting the freight and commercial equipment markets. It started to cycle back up early in 2017, but was boosted by the spike of confidence and regulatory rollback discussed previously.

Consumers

The consumer sector also has been growing all year. The unemployment rate is currently 4.1% (full employment is considered 4.0% due to transition factors). Although there are factors skewing this measurement, there are many more people working than several years ago. Wages have not risen as fast as expected and healthcare continues to eat up a chunk of disposable income, but consumers are spending at a healthy rate.

The Results

The U.S. economy grew at a 3.1% clip in Q2 and is expected to come in at around 3.0% for Q3. This is higher than most economists expected. It appears the spike in confidence after the election had an impact, but it took months before consumers and businesses actually opened their pocketbooks and began spending money. Of course, there are other factors in play, most notably the reemergence of the U.S. oil industry as the price of crude rises.
Interestingly, the biggest hindrance to future growth is lack of available workers. The reasons include:

- Structural Unemployment: Some available workers do not have the skills and training needed for the jobs being created.
- Cultural: Many younger workers prefer not to work in factories or in manual labor-type jobs.
- The Opioid Epidemic: A significant number of potential workers are addicted to pain medication (opioids) or cannot pass an employment drug test.
- Increased Safety Net: After the Great Recession, there were increased social welfare payments, then expanded health insurance benefits. This acts as a disincentive for some potential workers.
- Immigration Enforcement: Some undocumented workers left the country due to immigration laws being enforced.
- Demographics: The “Baby Boom” generation is retiring, and more workers are needed to replace them.

The Trucking Industry

A Much-Improved Business Climate
In March, just two months after Trump’s inauguration, the president of the American Trucking Association, ten leading industry executives, and twelve truck drivers were Trump’s guests at The White House. They discussed issues affecting trucking. They also brought along a high-tech truck/trailer combination in which the president was photographed sitting in the driver’s seat. This was a clear signal of a much friendlier business climate for the industry. The previous administration was perceived to view trucks as something that polluted the air and endangered the highways, and thus heavily regulated the industry.

Freight Growth Accelerates

Naturally, the improved U.S. economy, and especially manufacturing, generated significantly more freight. Freight growth was 2.9% in Q1 and has steadily accelerated throughout the year. Growth is forecast at an impressive 4.6% in Q4, which would bring the total year to 3.6%

Trucking Capacity

After years of slower, manageable growth, fleets struggled to increase capacity. FTR (Freight Transportation Research) estimates Class 8 truck utilization at 95%, much higher than the historical average (88%). Capacity utilization is expected to tighten over the next year, reaching as high as 97%. This has caused problems for shippers who are having problems finding trucks to make on-time deliveries.

Freight Rates

Freight rates have steadily risen as capacity has tightened. Loads and rates in the “spot market” (non-contract) have spiked as shippers seek carriers outside their normal channels to prevent late deliveries. Contract freight rates have not increased very much, but will when the new contracts are negotiated.

Regulations

The Trump administration did not revoke the requirement for Electronic Log Devices (ELDs), which becomes effective in December. This is because ELDs are a safety measure which ensures drivers follow the already established Hours-of-Service regulations. There has been an extension of when the ELD mandate will be enforced, however.

Most large fleets have already been using ELDs, however many small fleets are waiting until December to implement. History has shown ELD implementation can reduce a fleets productivity up to 10% in the short-term and then around 2-4% after that.

The regulations on trailers regarding the mandated use of glider equipment (tails and skirts) to improve fuel efficiency has been put on hold and is expected to be repealed. Other proposed regulations on trucking have been put under review. However, some safety-related ones may survive.

Driver Shortages

The increase in freight, the loss of productivity, and the retirement of aging drivers has created a high demand for new truck drivers. However, the tight labor market, discussed previously, and the undesirous nature of the job threatens to push the driver shortage to crisis levels. Some fleets already have brand-new trucks parked because they can’t find drivers for them.

Crunch Time

Combine the strong freight growth, productivity loss due to ELDs and a severe driver shortage, and the potential exists for an industry crisis early in 2018. It is difficult to predict the impact or the industry response to this unprecedented circumstance, but shipping disruptions will occur.

Commercial Equipment Markets

Class 8 Trucks

Class 8 truck sales weakened at the end of 2016, and some forecasters, though not FTR, expected the market to suffer a serious correction. However, after the uncertainty over the presidential elections faded and the surge in economic confidence occurred, sales came out of their tailspin and began a steady, moderate recovery. Overall, 2017 production will be decent (248,000 North America) with the second half build much higher than the first. The 2018 forecast is for 300,000, as the 2017 momentum is expected to roll into 2018, based on the factors listed previously.

Commercial Trailers

The North American commercial trailer market had another fantastic year. Production for 2017 is expected to come in at 315,000, a 2% increase from 2016. The trailer market has been uncharacteristically running ahead of the Class 8 market since the third quarter of 2016. This is because fleets were behind in their replacement cycles after the Great Recession. Many dry vans were parked for an extended period as the slow economic recovery continued. This disrupted trade cycles well into 2017.

Fleets are also buying more dry vans to compensate for reduced productivity due to regulations and the driver shortage. The use of drop-and-hook, dropping off one trailer and hooking up a different trailer, has become commonplace. Refrigerated vans and flatbeds also are increasingly doing this.
Refrigerated vans have benefited from a large increase of “temperature-controlled” freight such as pharmaceuticals, medicines, and chemical-sensitive products, etc. Consumer preferences for both fresh and frozen foods have also created more freight moves.

Flatbed (platform) trailers started a strong comeback in 2017. The growth of the industrial sector and the regeneration in the energy markets is creating more flatbed demand.

2018 Outlook

Next year should be more of the same for the North American commercial vehicle market. GDP is forecast at 2.9%. This could go even higher if tax reform is accomplished. Freight will continue to grow, just not at the robust pace of the last two quarters.

This should keep equipment demand vibrant next year. The North American Class 8 build is forecast to come in at 300,000 units, with trailers at 312,000 (down slightly from 2017).

The big concern is capacity constraints. Freight growth and reduced productivity mean more trucks and trailers will be needed. Where the drivers come from to operate the additional trucks is unknown. This does have the potential to crimp equipment purchases in the short-run. It will be interesting to see how this problem gets resolved.


Wednesday, December 13, 2017

Smooth Sailing But The Winds Are Calming

Note: This post originally appeared of the FTR blog in November.  Some of the economic indicators have been updated since then, however the conclusions and substance of the analysis  have not changed.
GDP has been above 3% for two straight quarters! Business people are giddy with excitement, as business conditions and confidence are at their highest level since the Great Recession. CEOs all the way down to factory workers are hopeful the economy has broken through seven years of the slow-growth recovery and will get even better in the future.
Early this year, the forward-looking economic indicators pointed to higher growth, or 3% GDP, for part of 2017. This combined with antidotal evidence from various industries was my basis for predicting higher economic growth this year. In this case, the view from the ground, talking with knowledgeable business people, was more accurate than the view from the air, the economists.
But where are we now? Are we headed higher or not? It’s time to revisit the indicators to see how 2018 will begin.
Leading Economic Indicators
The ECRI Weekly Leading Growth Index has been declining since peaking in February. It hit 0.8 in September. That was hurricane related, however, because it recovered to 3.2 in October. Similarly, the Conference Board Leading Economic Index has been slightly weaker than earlier this year, and the storms actually put it in negative (-0.2) territory in September.
Although these indicators have weakened, they are still giving positive readings. This is good news in that economic growth should continue into 2018. However, they are not forecasting stronger growth ahead, but a moderate slowdown.
Manufacturing
The ISM October PMI for manufacturing was a sturdy 58.7, down 2.1 percentage points from September. However, the forward-looking components of the index remain vibrant. The New Order number was at 63.4%, and backlogs remain solid at 55. In addition, customer inventories are regarded as too low.
Factory orders are growing again after flattening out in the summer. Data from the Philadelphia FED show manufacturing activity at a strong and steady rate for the past six months. Most commodity prices are much higher than a year ago.
This data indicates there is solid support for manufacturing activity in the short-term. It also says there is not impetus present which would push things much higher.
Housing
Building Permit data has been basically flat for the past year. The NAHB Builder Confidence Index remains elevated, but hasn’t changed much over the last 12 months. It appears housing with be neither a drag nor a boost to economic growth in 2018.
Business/Economic Confidence
The surveys from Gallup and Moody are still at positive values, just not at the high levels from earlier this year. This is not surprising since expected changes are moving much slower than people anticipated.
Consumers
Consumers are still consuming at favorable rates. Unemployment is low, and hiring is forecast to continue at steady. The Conference Board Help Wanted OnLine measure increased by 81,500 listings in October. However, my measurement of discretionary spending has been very flat since March. This indicates wages aren’t growing much beyond increases in expenses.
Transportation Equipment Market
Both the Class 8 and commercial trailer markets have slowed some after being robust through September. The pause was unexpected due to freight fundamentals remaining strong; however, it is consistent with the trends of the indicators detailed above. Both markets are expected to regain their momentum early in 2018.
Conclusion
Based on the indicators and data, it does not appear the economy can maintain its +3% growth rate in the medium-term. The good news is that even though the numbers have weakened some, they are still in positive territory.
Therefore, the economy should slow very modestly. It looks like we are still locked in a range where GDP increases moderately and then falls moderately. The difference now is that it is fluctuating at a somewhat higher range, peaks above 3%, than previously. So, it is good news, just not great news.
The Economists View

As a double check, the Wall Street Journal Economists Survey predicts a Q4 GDP of 2.8% and a 2018Q1 of 2.4%. The first quarter has been weaker than expected the last few years, so a drop to 2.4% seems reasonable. However, 12% of the respondents are forecasting a Q1 growth of over 3%.
The recent economic news (since this survey) has been very positive. The “bounce-back” from the hurricanes is providing an economic boost. Now 3% GDP in Q4 looks probable.

The Call
We will top 3% GDP in Q4 due to hurricane recovery and then drop below 3% in Q1. The economy should then resume it’s favorite “recovery” range between 2% to 3%. Of course, tax reform is the current wild card.