This
economic recovery has most assuredly been slow and steady. Just look at GDP
growth for the last 5 years:
2010
= 2.5%
2011
= 1.6%
2012
= 2.3%
2013
= 2.2%
2014
= 2.4%
2015
= 2.5%
Only
90 basis points of spread over a six-year period. Of course there are fluctuations, but
economic growth has exceeded 3% very few months during this time. A free market is supposed to generate a
business cycle, however the business cycle has been muted coming out of the
Great Recession. Possible explanations for this include:
-
Recessions
that damage the financial system, as the Great Recession did, take longer to
recover from, and economic growth is restricted for an extended period of time.
-
The
recession was so severe, businesses and consumers were very cautious in
spending and investing. This lack of capital flowing into the economy has
slowed growth.
-
The
Great Recession made businesses risk averse.
Companies did not take chances that had the potential to generate big
rewards; the type of gains that fuel GDP growth.
-
Interest
rates have been held constant at an unnatural, 0%, rate. In a free market economy, the cost of money
should never be zero.
-
Quantitative
easing – the government attempts to manage the economy, and thus dampens the
natural cycle.
-
Government
policies which limit economic growth.
The current administration greatly favors regulation over free market
policies. This flattens the cycles and
restrains GDP.
However, despite all the complaints about a weak, sluggish
recovery, the past six years have been very good for manufacturing. The slow,
steady growth has provided companies with a more stable, predictable
environment. This enables producers to
plan and schedule better, and to operate at peak efficiencies. As long as sales are increasing, even
moderately, costs get reduced due to the efficiencies and profits rise.
That is why corporate profits at manufacturing firms have
been so healthy the last few years. However,
the combination of slow growth and risk aversion means companies try to
maximize already existing resources.
This results in fewer new factories, new hires, and equipment
purchases. This, in turn, 
impacts GDP
and new job creation. Corporations have
been criticized for “sitting on profits,” but this behavior is highly rational
under the current environment. There is
limited benefit to reinvestment, and the perceived risk still remains.
The Class 8 truck and heavy-duty trailer is known for its large
business cycles. This market is tremendous
in good economic times, and horrible during recessions. It would be expected that the stable GDP
numbers would have smoothed out the industry cycle some this time.
Very interestingly, it appears this is not the case. The commercial equipment market has continued
to cycle up despite extended moderate economic growth. The industry has been impacted by the slow
recovery. The sales gains in the early
years of the recovery were modest, and this did extend the cycle. For example, commercial trailers are
experiencing their record sixth consecutive year of growth (5 years was the
previous record). However, the commercial
vehicle industry has cycled very high, as it normally does, despite all the
factors discussed previously.
The Class 8 market has been extremely hot, but has now
begun to cool off. Backlogs peaked in
February, and builds peaked in May.
Orders over the last six months are down 35% year-over-year. It was expected that the market would
gradually decline into a “soft landing” and not collapse as in previous down
cycles. Because, of course, the economy
is still growing, so the cycle should moderate, right?
However, preliminary Class 8 truck orders were alarmingly
low for November, indicating that production is going to drop faster than
anticipated, especially with inventories at record levels. The normal down cycle may be in play despite
a moderately growing economy.
Another consideration is that down cycles in the commercial
vehicle markets often precede weakness in the general economy. The good news is that the trailer market,
while peaking, has not begun its down cycle quite yet. Many economists believe that because the
economy is not cycling up rapidly, the next recession, due sometime in the
coming years, will not be that severe.
But let’s see how fast and how far the commercial vehicle market falls
for clues on the general economy.
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.)
