Friday, September 5, 2014

The Economy Could Use A Visit From Dr. Phil

A realtor friend told me the current housing market in Stark County (Canton, OH) is very frustrating for him.  He has many interested buyers, but there are not enough attractive homes for sale to meet this need.

Under normal conditions, this would be considered a “sellers” market because demand exceeds supply.  However, there is not enough selling going on because people are still reluctant to sell their houses.  The perceived value of the properties is still low, and people do not want to sell at a loss.  Under these conditions prices should be rising, but that means sellers would have to have the confidence to list their homes at higher prices.

I don’t believe that is happening yet.  Two homes in my neighborhood recently sold very soon after going on the market.  I doubt if either one were priced nearly high enough based on market conditions (please ignore my bias).

Economists would call this an “inefficient market,” but I call it a “dysfunctional market.”  People coming out of the Great Recession were filled with fear.  Some of this fear was rational and some was irrational.  Some of it quickly faded and some of it stuck around.

And this irrational fear which endures is messing up the housing market and the economy.  People keep asking whether the current economic conditions are the “new normal.”  I would contend that it is the “new abnormal” which will exist until the fear of the Great Recession is past and “normal” levels of rationality returns. 

This could take a while in housing.  Inventories of existing homes are at 2.3 million.  This is up 6.5% y/y, but 35% below where it should be, and still 43% below peak.  Housing prices are also rising, up nearly 8% y/y (Truvia) in July, but pricing growth has slowed recently.  Things are moving in the right direction, but at an excruciating slow pace.

Could be what the economy needs!
This market dysfunctionality has to be present in other industries as well.  Where fear is greater than confidence things are growing, but not as fast as they should.  When you add it all up, you get an economy moving forward at a very cautious pace and careful to jump back at the slightest scare.  Maybe the economy doesn’t need more economists telling it what to do; maybe it needs a visit from Dr. Phil!

Fortunately the trucking industry seems to have shed its fear and regained its confidence.  The Class 8 truck orders and commercial trailer orders started to surge in December and haven’t really backed off when you factor in seasonality.  The 29,500 preliminary Class 8 orders in July were the second highest total for that month ever.  June trailer orders were up a solid 35% y/y. There are other factors driving the market, but I do believe “buyer confidence” remains a significant influence.  

Because people talk and interact much in the trucking industry, this confidence can become contagious and provide strong market momentum.  Growing confidence and scarcity of open build slots may have been a big driver for the huge order volume in July.  It will be interesting to see how orders placed now are converted into shipments going into 2015.

Because the trucking industry can lead the general economy, it will also be interesting to see if other industries can break out of their funk and start growing strong again in 2015.  If this happens, GDP could exceed the forecast (2.9%) next year.

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

1 comment:

  1. Hopefully the enthusiasm being shown in the trucking industry will become contagious and boost the bottom line for 2015.