Tuesday, May 13, 2014

The Economy Is Thawing Out

“Frozen” isn’t just a hit Disney movie, but a description of the U.S. economy in Q1.  But this economic “performance” was no comedy and the initial GDP estimate came in at a paltry 0.1%.  This caused economists to go into full panic mode and to question when economic growth will resume.

And to this I say: Chill.  Okay, that’s not the right term in this instance.  Alright then: Thaw. As in the economy on some days in January and February was literally frozen.  Snowstorms, blizzards and bitter cold shut down economic activity in some locations and severely limited commerce in others.

Some economists claim that the anemic Q1 GDP “can’t all be blamed on the weather”.  I guess that’s true, but this was the most economically damaging winter since 1978.   And 35 years is too long for anyone to remember how that works (similar to forgetting how a recovery looks in my previous post).
It is very difficult to measure the full impact of the weather in Q1. I don’t have insight to how all industries were impacted, but I do have insight on how the commercial trailer industry fared.  I estimate that January production was reduced by 10% due to weather related factors.  Production was slowed also in February to a lesser amount.  The trailer industry is very representative of the U.S. manufacturing as a whole.

Another measure was the capacity constraints that showed up in the FTR freight measurements in Q1.  For example, YRC said Q1 freight flow displacements including service delays, pattern changes, and productivity losses, reduced profit by approximated $20 million. Shippers had trouble
There were many unexpected "Ice Road Truckers" this winter
moving goods during the severe weather conditions (no surprise there) but when freight doesn’t move productively, commerce gets restrained and economic growth suffers.  This may be a simple concept, but it is something the government bureaucracy should be aware of when the slew of planned trucking regulations start to hit.

Further evidence of the weather impact is the government data reporting non-farm productivity fell 1.7% in Q1 after being up 2.3% in Q4, 2013.  Manufacturing hours dropped 1.4%, and remember, Q4 numbers are impacted by the holidays.  Yes, the weather had a huge impact on manufacturing.

Weather issues also impacted the consumer side.  When you are “snowed in” you are not out “consuming”.  You are not going to restaurants, you are not shopping, you are not purchasing services, and you are not traveling.  Some of this business is recovered after the thaw, but not all.

The other thing you see is a slew of economic good news after conditions returned to “normal”. Retail sales, auto sales, manufacturing, industrial production and the leading economic indicators all started flashing positives.  The Economic Cycle Research Institute (ECRI) Weekly Leading Growth Index has been steadily climbing since the end of February.  Of course some of this economic energy is catch up from the “ice age”, but not all.  I believe this “restart” will provide momentum for stronger growth in the second half of the year.

Unfortunately the news about Q1 is expected to get worse.  Economists analyzing the data expect Q1 GDP to be revised downward and of course that would mean it goes negative.  This will lead to more wailing and gnashing of teeth about the economy.  But this is the equivalent of feeling uncomfortable now about how cold it was in February.  It is much better to concentrate on the good things happening in the present and the forecast for the future.

As the hit song from “Frozen” proclaims: “The past is in the past”.  The economy was very weak at the start of year, but it’s time to let it go.

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, May 1, 2014

A Real Economic Recovery Has Begun – Finally!

I was sitting in my Northeast Ohio office in 1986 when the building began to shake.  I ran out into a hallway where a group of my alarmed coworkers had gathered.

“What was that?” someone asked.

“I’m not sure because I’ve never experienced one before, but I think we just had an earthquake”, I said.

No one agreed with me, although no other explanations were offered.  Just then an older engineer, who had once lived in California, came flying around the corner and enthusiastically asked, “Hey, did you feel that earthquake?”

No one believed it was an earthquake because they didn’t know what an earthquake felt like.  I believe that an actual economic recovery has started, but people are skeptical because they either don’t know or have forgotten what a real recovery looks like.

Now this is totally understandable when you consider that the last “real recession” (I am dismissing the mild recession of 2001-2002) was in the early 90’s, which means the last “real” recovery occurred over 20 years ago.

I believe a real economic recovery started around October of last year.  It was temporarily derailed by the harsh “Winter of 2013-2014”, but is now resuming.  If fact the bad weather may have actually provided momentum to the recovery, similar to bobsledders rocking the sled backwards before pushing it forward.

There is a business district near my home that was devastated by the Great Recession.  It started showing some evidence of life two years ago, but now there are some very obvious signs of recovery:

-         There are four major construction projects in process on the outskirts of the affected region.  There is a repair facility to support the fracking industry. There are two new office buildings, one medical and one professional.  The other project is a full-service hotel.  There is still more development planned and a nearby road is being expanded to support it.

-         The business plaza in the center of the district is being totally remodeled. The owner obviously believes he will have new tenants soon.  The office complex across the street is now at full occupancy, the first time in five years.

-         There is new “high-priced” housing construction in the suburb just west of the area.  A thriving housing market existed there before the recession, but no new houses had been constructed in at least four years.

And those “green shoots” that everyone has been seeking for the last five years are suddenly appearing everywhere.  Hotel usage is up, unemployment claims are down, manufacturing keeps improving, the energy sector has been revived.  Several economic indicators have begun flashing “green”. Yes, this is what the beginning of a real recovery looks like.  It’s just taken forever to get here and we have been disappointed so many times in the past that we are not convinced. 

There are two sectors lagging the recovery: Housing and Employment.  Housing has lagged the recovery from the beginning because it was the last to crash, the worst to crash, and it hit bottom after the recession had officially ended.   Therefore its recovery started late and it has been slow.  This was a different type of recession and this is a different type of recovery.  Usually housing leads us out of a recovery, this time it will lag, but not prevent, it from happening.  Credit is still tight, but once the financial markets fully heal and the job market improves, housing will grow just fine.

The unemployment rate is headed down. It is at 6.7%, 80 basis points lower than a year ago.  Normally this would be great news if it wasn’t for the drop in the labor participation rate.  The Great Recession created significant structural unemployment due to the high numbers of older workers with non-transferable skills who lost their jobs.  These people are going to have trouble finding work even in a recovery.  This makes the unemployment situation difficult to gauge.  I just overheard two business owners (one in manufacturing, one in service) bemoaning the fact that they both were having problems hiring enough workers.  With the increase in business activity, job growth has to follow soon.

The conventional wisdom is that the recovery is still lethargic.  This week a Wall Street Journal headline proclaimed: “Sluggish Recovery Proves Resilient”.  Only 26% of economists in the latest WSJ poll believe GDP will hit 3.5% or higher in either the Q3 or Q4.  The FTR forecast is in line with this thinking, with Q3 and Q4 at 3.1%.

But I believe the “recovery” train has left the station and will only pick up steam the rest of the year. If this is true, growth will be between 3.5% and 4.0% in Q3 and Q4.  It would start to look like a real recovery at long last.

The question that everyone has been asking for the last several years is: How long is it going to take to recover from a recession this severe?  The answer: This long. 

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.)