Wednesday, March 18, 2015

I’ve Lost That Economic-Loving Feeling

I’m kind of losing that “economic-loving feeling.” The ISM (Purchasing Managers) Index is weaker, exports are down, construction down, factory orders down, retail sales are below expectations, unemployment claims are up, and the Q4 GDP was revised down to 2.2%. Is this a problem?
It’s difficult to tell. The West Coast ports will be constipated for at least two more months. Not getting the stuff in hurts retail sales and increases manufacturing costs; not getting the stuff out really slows exports. New England is still literally buried in snow, and this year’s Siberian Express made the Polar Vortex put on a sweater.

So let’s check out some forward looking economic indicators to try to find an answer:

ECRI (Economic Cycle Research Institute) Weekly Growth Index

This index used to be “money” before the Great Recession jumbled all the economic data, but it still is reliable at forecasting the direction of the economy. The index peaked around May and has been running in negative territory since October. Considering the index is designed to forecast conditions six months out, it says things should start weakening about now.

The Call:  Very Interesting – but not in a good way.

Leading Economic Index (The Conference Board)

Up 0.2% in January, 0.4 in December, and 0.5% in November on the surface it looks positive, however their last summary says that “growth has moderated in recent months” and there is “downside risk” for the economy.

The Call:  Nervous about this “downside risk” statement considering the current environment.

Home Builder Confidence Index – (NAHB)

Down two points to 55 (50 is neutral), attributed to bad weather across much of the nation (although the index is supposed to be forward looking). The good news: housing is holding steady with the 2015 forecast. The bad news: housing is holding steady with the 2015 forecast.

The Call:  No news is fair news. If things are slowing, it is not due to the housing market.

Moody’s Survey of Business Confidence

“Confidence is especially strong in the U.S. where businesses are feeling good about sales, hiring, and investment.”

The Call:  Business executives still expect 2015 to be another decent year.

The NFIB Small Business Optimism Index

At 98.0 in February, basically flat from 97.9 in January. This index has stalled out, after a strong run in Q4.  It peaked at 100.4 in December, the first reading over 100 since the Great Recession.
The Call:  Hard to call, but there is a good chance it indicates moderately slower growth.

Bloomberg Consumer Comfort Index

This weekly measurement of consumer confidence was up 70 basis points to 43.5. However, this index had been declining in February and is still near its low point for the year. The “National Economy Subindex” portion hit a seven-and-a-half high in January, and then started to fade.
The Call:  This index is fairly reliable and it indicates consumer sentiment, and, therefore, future retail sales are weakening.

Philly FED Manufacturing Business Outlook Survey

The diffusion index for current activity fell slightly to 5.2, from 6.3. The diffusion for general future activity did take a noticeable dip however and is the lowest point in two years.

The Call:  It does appear that manufacturing growth in 2015 will be slower than 2014.

What It Means

These indicators, as a group, point to slower economic growth for the first half of 2015. Does this mean weaker than the 2.2% of Q4, or the 2.4% of 2014? Hey, I guess it doesn’t matter much, does it? None of the indicators are flashing “red” yet, except for the ECRI, so I think growth continues in 2015. The good news, if any, is that the economy is not overheated, so maybe just ease into the next recession, whenever that occurs.

The Scoop

The Wall Street Journal’s economic panel is forecasting GDP at 2.7% in Q1 and 2.9% in Q2. Based on these forward looking indicators, I’m betting on the “under.” 

Yes, I’ve lost that economic loving feeling – “Now it's gone...gone...gone...”

Friday, March 6, 2015

How Is Your Industry Functioning After The Great Recession?

The Great Recession has led to the Great Reset.  It was so disrupting that industries, markets, and leading economic indicators have been thrown off kilter.  Even though we are into the sixth year of the recovery, many industries remain dysfunctional is some way.

This clock was very accurate before the
Great Recession
Below is an example of what is happening in the Class 8 truck market.  It is having its best year since 2006, yet the traditional methods of tracking and forecasting the market are still unreliable.  The forces of demand and supply are of course active, but the environment is very different than before.

Strange Happenings In The Class 8 Truck Market

Something strange is happening in the Class 8 truck market. We just had record quarterly orders in Q4, making 2014 the second-highest order year ever. This order deluge has pumped up backlog to the highest point since 2006.

So you would expect production in 2015 to get off to a rip-roaring start, with factories going full-out to churn out loads of trucks to satisfy this torrid demand. However, this did not happen. January production was much below expectation, 18% lower than last November, on a per day basis. Factories were easily able to satisfy order requirements without working much, if any, overtime.

What is going on here? It’s not enough to just look at the order and backlog numbers by themselves, it is also important to analyze the delivery dates on the orders and the quarterly distribution of the total backlog.

I had previously posted about the unusually large number of orders placed in 2014Q4 for second-half 2015 delivery. However, what was not obvious at the time was that not enough of those orders were being placed for 2015Q1 delivery to put significant pressure on OEM build rates in the short-term. In other words: many orders for delivery in seven months, fewer orders for delivery in three months.

Yes, order patterns had changed in two important ways, both related to the Great Recession. First, some of the Q4 orders can be considered “catch-up” orders. They should have been placed up to a year earlier but were not, due to residual caution and risk aversion from the Great Recession. It is the pent-up demand from fleets needing new equipment, for both replacement and expansion, but not placing orders because of leftover economic anxiety. By using a new data analysis method, FTR was able to determine that the backlog of six months ago was inadequate to support the expected sales. Therefore, orders needed to increase to support the market environment. We got them, but a few months later than normal.

The second factor is that the Great Recession caused OEMs to reduce industry capacity. Several plants were closed, resulting in capacity falling from 375,000 units/year to 350,000 (new calculation based on November 2014 production rates). Because of very tight production capacity in Q4, fleets were motivated to place large orders to reserve production slots in Q3 and Q4, 2015.

Truck OEMs are resistant to investing in new fixed capacity because of the cost and the cyclical nature of the business. These types of decisions are being made throughout the industry. One component supplier that closed three plants during the Great Recession opened a brand-new facility last year.
At this point, it looks like the extra-heavy Q4 was the result of OEM sales strategies to try to gain or lock-up market share this year. It does not appear the huge orders signaled record sales, and production capacity should not be maxed in 2015. Of course if the economy and freight grow faster than forecasted this year, increasing truck demand could indeed maximize production.

Things are different on the trailer side. The orders have been huge, but most of the major OEMs are running at full capacity and expect to stay that way through at least Q3.

How Is Your Industry Functioning After The Great Recession? I would like to hear about the struggles you are facing.  Please email me at