Thursday, February 27, 2014

Raiders of the Lost Recovery

We Were Raided

Once upon a time there was a land where the people lived a very carefree life.  There was dancing and parties and frivolity.  People built houses and businesses and careers.  And the moneymakers took risks, even big risks, with no fear of any harm.

Then without warning the raiders came.  They stole, they killed, they destroyed.  The land was devastated.  Things people spent their entire lives building lay in ruins.  The people in the land were hurt and terrified.  Almost everyone had suffered some type of loss due to the raiders.  Those who had escaped the raid, felt fortunate.

Where Is That Recovery ?
The overwhelming emotion of the people was fear.  They were all afraid the raiders might return soon and destroy what remained.  Instead of working hard to rebuild the land they had, the people very slowly, very cautiously started to move forward.  Some rebuilt very slowly, some rebuilt much smaller and some reasoned it was not worth rebuilding at all.  There was no sense in taking any risk, since the raiders could return and destroy it again. 

The Great Cautious Recovery

Fear is one of the strongest human emotions and the Great Recession was one of the most fearful events this generation has ever faced.  And fear impacts economic decisions.  For a long time economists tried to downplay this impact, but the connection between economics and emotions is now an active field of study.

So now we have the “Caution Economy”.  It’s like a traffic light that is stuck on yellow. Things are messed up, no one has any experience dealing with this and it causes consumers and businesses to operate slowly and dysfunctional.

Everyone is overly cautious because we all came through this crisis together and now everyone is moving forward, very slowly, as a group.  It is becoming part of our culture.  Risk-taking isn’t valued in this economy, it is frowned upon.  The result is that in the fifth year of this economic recovery, progress is still excruciatingly slow.

It’s no surprise that various stimulus programs did not work as well as expected.  When we are fearful, we are not in the mood to be stimulated.  And historically low interest rates means the government is begging us to borrow money.  But we don’t, because we are still afraid we could lose it.

And we had legitimate reasons for not being more confident about the future.  The government does not give us confidence, the world economy does not give us confidence, and the financial markets do not give us confidence.  The government in many regards has made things worse by displaying a dangerous lack of knowledge of how businesses function.

We have been stuck on “slow” for so long that we are being conditioned to believe this is “the new normal”.  You can read articles every day that include: cautious, low-risk, modest, sluggish, etc.  We have repeatedly heard that businesses are “keeping a tight rein on spending” and this reinforces our own cautious behavior. Therefore the mass caution leads to a sluggish economy, which of course leads to more caution.  We are swimming in circles afraid to venture out too far because there might be sharks in the water.

A Cautious Transportation Market

This “Caution” economy has impacted the transportation market in several ways:

-         Very “choppy” freight demand has made it difficult to make decisions in the short-term or plan in the long-term.

-         There was significant over-capacity in the market that has taken an extended period of time to be depleted.

-         Equipment has been run a longer period of time which has disrupted traditional trade cycles.  This has occurred because trucks are being run less miles due to weak freight demand and trucks and trailers being run more miles due to the economic circumstances.

-         “Rehiring” has been slower for suppliers, support industries and non-driver fleet personnel because companies remember how painful it was to lay off workers when our industry was decimated by the recession.
-         Industry equipment purchases hovering around “replacement demand” levels. 

-         Part of the driver shortage might be the reluctance of workers to re-enter the industry and new workers to enter this industry after the big layoffs when the recession hit.

Signs of Life?

Thankfully we are seeing signs of life in the industry.  The recent increases in truck and trailer orders show that fleets are becoming much more confident of future business growth.  And confidence is contagious. As soon as some people begin taking risks, more people become comfortable doing the same.  Another factor is “pent-up demand”.  You get significant pent-up demand during periods such as this because even though fleets needed new equipment, they were cautious and “were keeping a tight rein on spending”.  Pent-up demand is tricky because you know it exists, but it is very difficult to measure.  The problem for equipment manufacturers is that pent up demand tends to be unleashed without much warning.  Once some fleets start to buy, they all start to buy.

Because trucking is a leading indicator for the general economy, the recent upswing in equipment orders is a very good sign for future GDP growth.  Although some recent economic reports have been negative, the bad weather conditions in December and January had a bigger impact on the economy than economists realize.  Look for the economic indicators and the outlook to improve in the months ahead.

(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.)

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