Friday, April 17, 2015

Did the Economy Just Literally Run Out Of Gas?

The Federal Reserve of Atlanta made big news last week when it announced it lowered its forecast for Q1 GDP growth to 0%. Yeah, that’s zip, zero, nada, nothing!

Most economists had downgraded their forecasts, but this announcement still was a surprise. Commentators quickly blamed bad weather as the reason. As I have mentioned before, this year’s weather was extreme, but it did not disrupt manufacturing nearly as much as last year’s Polar Vortex.

There were piles of snow in the Northeast, but that would impact the service industries more than manufacturing. However, the ISM Non-manufacturing Index was at 56.5 before the bad weather and 56.5 after (with little variation in between), so the service sector couldn’t have been hit too hard.

The other factor in Q1 is the West Coast Port Strike. The strike was settled in February, but it caused finished product and component product disruptions before then and will continue to create issues through May. The impact is difficult to measure. Some plants did shut down for a couple days due to lack of parts. However, most manufacturers found ways to work around this issue, albeit at higher costs. So again, there is an impact, but not a significant one.

Economists who believe the weather and port problems are the reason for a weak Q1 predict a “snap back” in Q2. But the data doesn’t support this yet. The ISM manufacturing index for March was 51.5%, actually down from 52.9% in February. The Wall Street Journal Economic Survey Panel (March) is forecasting 3.0% for Q2, an improvement back to previous expectations but certainly not a snap back.

Let’s assume that the Wall Street Journal Panel Q1 forecast of 2.3% took into account the weather impact. We will subtract another 80 basis points due to the port strike. That gets us to 1.5% growth. If we assume the Atlanta FED forecast is correct, what caused the 1.5% to evaporate?
What has changed recently? What significant economic occurrence? What, what, what? Oh yes, crude oil prices, and thus gasoline prices, have plummeted.

But wasn’t that supposed to be a boon to the economy as an estimated $70-$100 billion dollars poured into consumer spending as disposable income grew? Except it hasn’t happened. Consumers are not spending the extra “gas savings” cash as freely as they did in the past. Why? What is different this time?

The Great Recession changed many things, including consumers’ attitudes. One week your job was going great, you were making good money, and running a big credit card balance. The next week you were unemployed, with no hope of finding a job quickly, and no chance of paying off your debts for a long time. After the Great Recession, people are more conservative with purchasing decisions and, this time, are not spending the gas savings windfall.

Of course when crude prices fell, economists warned that the economy would also take a hit due to reduced oil and gas exploration infrastructure and drilling. This part of the equation has come true, although actual production remains fairly steady.

Conventional wisdom would say that the energy industry is a small segment of the total economy and a slowdown in activity should have a limited impact. But what if the conventional wisdom is wrong? At times during this long recovery we have heard “the energy sector is the only area of high growth.” We have seen better job growth numbers, followed with the caveat of “most of these jobs are low-wage positions in the service sector, except for all the higher paying jobs in energy.” Perhaps it was the energy sector and the ancillary spending, jobs, and positive news that was driving the modest economic growth for the past few years. And now, there was an unexpected shock to this growth machine that is letting the air out of the growth balloon.

Remember that economists were confused by having a recovery which wasn’t led by housing; so what then was leading it, beyond energy? Also, we do know what happened when the economy, being led by a housing surge, albeit artificially generated, crashed due to an unexpected shock to that industry.

I’m going to predict that the energy slowdown is having a much bigger impact than anticipated. It is probably not responsible for the entire 1.5% drop mentioned previously; the stronger U.S. dollar is hurting exports, so this causes part of the drag.

How viable is the Atlanta FED 0% Q1 GDP forecast? The lowest forecast in the March WSJ poll was 1%. However, that forecast is from Brian Wesbury and Robert Stein from First Trust Advisors, L.P. And these guys are good. They write the First Trust Economics Blog – The Antidote to Conventional Wisdom, so naturally they are two of my favorite economists. And it looks like they were way ahead of the game on this one.

It would appear the engine of economic growth has literally run out of gas. Regardless of what caused the slowdown, the momentum has been lost. Unfortunately, it appears it will be much harder to regain traction this time.

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.)

Friday, April 3, 2015

Freight Markets Are Good - But Not Great

At FTR (Freight Transportation Research), we are literally “all about the freight,” no kidding. We believe understanding the freight market is the key to understanding trucking, railroad, intermodal, and, ultimately, the economy.

So we are very concerned that the February Industrial Production numbers showed manufacturing output dipped 0.2%, down three months in a row. In addition, the January and December numbers were adjusted downward.

Is there a problem lurking here? Every month the experts at FTR dive deep into the freight data to understand where we are and where we are going. It is a finger-on-the pulse and ear-to-the-ground type of analysis.

What is the Current Freight Situation?

Sectors Doing Well:

·       Food – more jobs equate to more consumption and more people eating out

·       Fabricated Metals – auto industry is expected to have another good year

·       Stone, Clay and Glass – non-residential construction is on the upswing

Sectors Showing Weakness:

·       Chemicals – not sure why yet, but trend is not good

·       Metal Mining/Primary Metals – commodity prices much weaker

·       Lumber and Wood – not horrible, but housing starts still slow

·       Petroleum – due to the drop in crude prices, but not as bad as expected

·       Coal – regulation continues to batter this sector

There are fewer chemical tanker loads right now. 
What This Means for Truck Freight

We see truck loadings down slightly, a minor deceleration of growth. Q1 weakens and Q2 weakens some more. This means our forecast for 2015 freight growth is now in the 3-4% range, down from 4-5%.

Much of this weakness is in the Dry Van trailer sector, especially in commodities hauled a long distance. The liquid tanker sector is also suffering due to the slowdown in chemicals and petroleum. The Bulk/Dump sector is down slightly, and the Refrigerated Van and Flatbed sectors are holding up well.

What This Means for Rail Freight

On the rail side: Grain, Lumber and Wood, Chemicals, and Motor Vehicles are doing well. Coal, Frack Sand, Petroleum, Pulp and Paper, and Metals are weaker. Overall, the rail freight 4-week moving average is down 2.6% year-over-year.

The Wild Cards

Normally this freight situation would be cause for alarm, however there are two external factors impacting the data. The recently settled West Coast port strike restricted component parts from getting to some manufacturers causing disruptions. It also prevented some products from shipping out. In addition, it has created major problems for intermodal freight.

The second factor is the Siberian Express effect in February. Last year’s Polar Vortex caused major disruptions to manufacturing, especially in the Midwest. I do not see the similar trends from the Siberian Express this year. It did have an impact on commerce, especially retail sales, but it did not have a big impact on the industrial side.

Therefore, we know freight and economic growth are slowing, but we don’t know if it is a short-term situation caused by these abnormal factors or if there are other reasons behind it. The data and the trends are unclear, making it too soon to tell.

Service Sector Still Lags

Manufacturing (and thus freight) has been stronger than services in this recovery. It is usually the other way around and, therefore, we have been expecting the service sector to catch up. This has been confusing; however, maybe the depth and nature of the Great Recession provides an explanation. Many services are substitutable, meaning you can perform the service yourself. So maybe people are still doing their own landscaping, painting their houses, and grooming their pets, instead of paying others to do it. Real unemployment is still high and incomes have not recovered, so this would make economic sense.

If we now expect freight (and manufacturing) to grow around 3.5% this year, then, based on the last few years, the economy would be growing slower than that, somewhere in the 2.5% - 3% range. This is consistent with most current economic forecasts. My prior analysis of leading economic indicators would indicate the port strike and weather are minor factors, and the overall trend is pointing to slower growth.

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.)