Monday, June 29, 2015

Is There A Hole In Our Pocket?

“Now I've got a hole in my pocket, a hole in my shirt, a whole lot of trouble, he said

But now the money is gone, life carries on and I miss it like a hole in the head” 

(Passenger – Michael David Rosenberg)

When gas prices fell dramatically last fall, I enthusiastically predicted it would be a big boost to the economy with more than $70 billion, yeah $70 BILLION, in added consumer spending flowing into the system.  And I even thought the impact would be greater than normal due to the psychological boost it would provide to consumers.  Why did I believe this? Because in the past a drop in gas prices usually produced the same impact as a tax cut and consumer spending increased.

Well welcome to the 2010’s where you can’t rely on some types of historical data to forecast the future.  I have been claiming since 2010 that certain past reliable economic indicators are broken and are still unreliable.  And even then I have made at least two inaccurate predictions in the past year that were based on “rock-solid” history. Those rocks are now crushed stone.

Retail sales have been moderate and inconsistent at best since October and that “huge” economic boost equated to a negative GDP in Q1. So what the heck happened here?

It was expected that weaker crude oil prices would hurt the energy industry, however economists did not think crude would go so low and stay depressed for this long.  It turns out that the energy markets were a significant growth engine for the entire economy and fueling considerable ancillary spending. Once the air was let out of that balloon, the economy began to stall.

However, the bigger question is: What happened to all this money the consumer pocketed from lower gas prices? If we didn’t spend it, where did the money go?  Here is the speculation:

We Saved It
Some economists speculate that the savings rate has increased since the Great Recession.  There were long lasting cultural changes regarding saving and spending following the Great Depression, so the thinking is people’s attitude and behavior have changed due to going through the Great Recession and they are managing their money more responsibly.

I’m not really buying into this one.  This is probably true for a small segment of the population, but I still believe this is a consumption-crazed society and it will take more than just a recession to change that.

We Don’t Think It Will Last

Consumers aren’t spending the windfall because they don’t expect gas prices to stay low.  And to a certain extent they are correct.  The average gas price is now $2.82/gal up from the low point of $1.98, but still 90¢ lower than a year ago.  So maybe this money will be spent on something in the future, but not now.  Technically it is “savings”, but functionally it is delayed spending. Regardless, it’s not being spent.

Nervous Consumers

There have been surveys showing people are getting more nervous about losing their jobs.  This is perplexing based on the fairly positive jobs data this year.  Maybe it was the announcements of future job cuts by some large corporations at the beginning of the year which spooked people.

Regardless, the gas savings has not made consumers more confident.  The UM Consumer Confidence Index was 94.1 in October and only 96.1 now.   It did grow at the beginning of the year but has moderated since.  Likewise the Gallup Economic Confidence Index was -13 in October and -9 now.  If consumers are not confident about the future, they don’t spend money in the present.

Wealthier Consumers Are Not Purchasing Luxury Items

There have been articles detailing this trend.  People were spending recklessly before the recession and now could be reverting to more normal patterns.  After everything that has happened and the derision of the “rich” in the news/political arena, conspicuous consumption is not as valued as it had been.

The Costs of Healthcare Are Increasing

There have been numerous articles and analyses done on the increased costs associated with healthcare. Forget about the cases where the cases where someone’s premium goes up 80%, consider a more normal case where someone’s premium went up $20 a month and their deductible increased by a $1000 at the start of 2015.  Throw in some higher co-pay fees and lower reimbursements for services by your insurance company.

The Affordable Care Act may be far from affordable for most people.  I believe almost everyone was impacted by it.  The insurance companies and doctors are not going to make less money, so they figured out ways to extract more money from the people who already had insurance.  I know I am paying more.  My family used to hit our deductible around May, now we never hit it. I am writing small to moderate checks the entire year for medical bills.

That may have been the plan all along. For people to write “absorbable” checks every month so they don’t realize how much more they are really spending.  The problem is all the “micro-checks” when added together can cause a macro impact on the economy.  Add this impact with the employment issues (29 hour work week, 50 employee small business clause) and the Affordable Care Act may turn out to be a huge drain on economic growth.

That means in January, just about the time people were getting ready to spend their gas dividend (economists say there is about a two month lag from when gas prices fall), their healthcare costs increased, wiping out that savings.  It means we tried to pocket the savings, but there was a hole in this pocket.

Economists calculate the average household savings on lower gas prices will be about $700.  If you spend an additional $700 on healthcare during the year, you break even. If your healthcare costs rise more, you lose.  Increased healthcare costs may be reason for disappointing retail sales in 2015 and may have contributed to the weak Q1 GDP. 

It may have been a fortunate coincidence that consumers got more money from gas savings just as they were required to pay more money for healthcare.  However, we may not be nearly as fortunate if gas prices rise back to previous levels just as the 2016 healthcare increases hit.

“Now I've got a hole in my pocket, a hole in my shirt, a whole lot of trouble, he said

But now the money is gone, life carries on and I miss it like a hole in the head

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, June 11, 2015

Mixed Signals in the Economy Cause Uncertainty Everywhere

The economy continues to send mixed signals.  You look at some indicators and things look good. However, other important indicators signal doom is right around the corner.  It is a mixed-bag; it is mumbo-jumbo; it is a dog’s breakfast of economic proportions.

But how does this uncertainty play out in real industries?  What problems is it causing? How can companies plan under these circumstances? Have the extended, long-lasting, low interest rates created any bubbles?

The commercial vehicle market displays some of these peculiarities.  Even though the economy has not experienced its typical cycles since 2011, this industry has been performing in a somewhat typical cycle for the past few years.  This market is approaching the peak and should get there late this year.  So as the economy stalls, business is still booming, but for how long?

Here is an analysis of the current state of the commercial vehicle market:

Order rates in both Class 8 and Commercial Trailer markets have started to weaken after achieving sky-high levels at the end of 2014.  Backlogs have peaked for this upcycle and started their decent. The big question now: when does production start to fall?  It is a very interesting question, because production is increasing at the same time orders are falling. 

However, there are significant economic factors to be concerned about.  The economy has temporarily stalled out and is expected to show almost no growth for the first half of the year.  No big “snap back” is expected in the second half of the year either.  The slowdown in the industrial sectors of the economy impacts freight growth, of course, and the forecast for truck freight has been lowered for the year.

Weakening freight demand and declining orders would almost always result in lower equipment forecasts, but the situation is complicated by the huge backlogs.  OEMs have many orders booked for Q3 and Q4, the result of the deluge of orders received from September 2014 through January 2015.  Backlogs are strong enough to support the production forecasts even if orders fall to traditional low levels this summer.  The current forecast assumes that production will remain near current levels for the rest of the year.

The key question now is: how solid are these backlogs?  This is important because most of the orders for delivery in Q3 and Q4 were placed 8-12 months in advance to reserve scarce build slots at the OEMs.  The OEMs had “right-sized” after the Great Recession meaning there was less industry capacity to handle the peak of the current upcycle. 

Fleets were anticipating a continued strong, growing economy when they placed these orders; however, based on the current economic reports, things may be much different.  Two months ago, OEMs were very confident that the orders were “real,” “solid,” and would be built.  Now they are hoping that this will be the case.
What happens this time after you reach the peak?

OEMs made rational decisions to “lock up” future build slots with these so-called “place-holder” orders, since there is no penalty for future cancellations.  However, based on the current economic forecasts, these orders become more tenuous every day.  There is the possibility that all the new equipment being put into service over the next few months will create enough extra capacity that all those units on order may not be needed.  Unfortunately, the industry has experienced this situation before during economic downturns.

It is expected the great majority of these orders will, in fact, be produced. However, the possibility exists that some of these orders could be cancelled, or, more likely, moved out for delivery in 2016.  It is an uncertain backlog, in an uncertain economy.  It will be interesting to see how this mixed bag falls out.


I know other industries have to be experiencing unique situations, even six years after the Great Recession.  It is my contention that the recession continues to impact business and consumers significantly, in ways it will take economists maybe decades to understand.

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, June 1, 2015

It’s Starting To Feel A Little R-wordy

It’s time to discuss the R-word.  The R-word is the economic equivalent of those other “letter defined” words that you cannot say.  That’s because talking about the R-word is unpleasant, distasteful and is not suitable for speculation in esteemed economic circles.

That being stated, it’s beginning to feel a little R-wordy.  I say feel because you can’t really see an R-word coming and neither can you hear it.  It invades the economy like a bad cold virus. It does its work in secret, much below the radar, until it becomes burdensome to everyone. 

When R-words occur everyone is so surprised.  How could this have happened?  Why didn’t anyone see this coming?  But you seldom do. R-words actually begin months before they are discovered. They are similar to cheating lovers suddenly being revealed. Again there is much shock, outrage, and despair, when an R-word is uncovered.

So R-words are only felt, sensed, and detected by intuition before their arrival.  And it feels very R-wordy right now.  Q1 GDP is currently estimated at negative 0.7%.  Because the technical definition of the R-word is two consecutive quarters of negative growth, if Q2 GDP is negative, we have an R-word.   Provided Q2 is again just slightly negative and growth resumes in Q3, it would be one of the weakest R-words on record. 

Just heard someone say the R-word!
If this is the bottom of the economic cycle and the economy began growing again, this would be a good thing.  However, there is a psychological element to R-words and headlines such as “U.S. Economy Goes Into (R-word)” could cause disruptions in consumer spending and the stock market.

Some economists claim weak Q1 GDP was a result of bad weather and the West Coast Port strike.  These had an impact but not as much as you might think.  The biggest impact of the weather was in the Northeast and it did not impact manufacturing much, unlike last year’s Polar Vortex.  In addition, economic data from the period during the strike show that the effect was limited in duration.  Other data suggest the economy had already started to slow down at the beginning of year and these addition factors hastened its decent. 

Therefore Q2 economic growth becomes critical.  How’s it looking? In a word, tenuous.  Current data on Retail and Wholesale Sales, Factory and Durable Goods Orders, Wholesale Inventories, Export Sales Growth and Import Prices are all flashing red. (To see the graphs and detailed explanation, click link at the end).  Of course there are other indicators, The Conference Board Leading Economic Index for one, that indicate there will be no R-word this year.  This is not an unusual occurrence, it remains a strange economic environment and some indicators have been inconsistent or unreliable since the Great Recession (word is permissible in the past tense only).

To try to figure this out, I called economist Pat.  I believe economist Pat is a brilliant economist because he and I almost always agree on almost everything.  I remember calling Pat in December of 2007 because I was feeling R-wordy and he said he was feeling it also – and that time we turned out to be correct.

So what does economist Pat say?  He believes Q2 GDP will come in between 1-2% positive.  Not a great quarter, but not that close to an R-word.  

The Economic Cycle Research Institute’s (ECRI) Weekly Leading Growth Index also says no R-word.  It crossed into negative territory last October, bottomed out between January and March, but now due to solid growth since then, is well in positive territory.

So now I do feel much better, but I still don’t feel that great ……

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.)