Monday, March 21, 2016

Expect A Recession By Year End – So Says The Commercial Truck Market

Right into the Danger Zone
Highway to the Danger Zone
Right into the Danger Zone
                             Kenny Loggins

Economic recessions are incredibly hard to predict.  The next one, even more so, because the Great Recession was so impactful that some economic indicators and industry cycles have yet to return to a “normal” state.

This is important because forecasters use current conditions, combined with past conditions and trends, to predict the future.  If you do it any other way, you are either guessing or you are psychic.  Now I have been accused of being psychic, which is actually a good thing in this case.  It means your forecasts are accurate and people can’t figure out how you did it.

Regarding the upcoming recession (everyone can agree that recoveries don’t last forever), there is naturally a wide divergence of opinion.  That is because a wise man once wrote “Economic recessions are incredibly hard to predict”.  The forecasts regarding the next 12 months are:

There Definitely Will Be A Recession

Rogers Holdings Chairman Jim Rogers said in a recent interview there is a 100% probability there will be a recession before March 2017.  Rogers is a well-respected investment executive, so when he says 100% it gets your attention.  So it’s looking bleak in Mr. Rogers neighborhood.

There are many other economists predicting a recession.  They make solid, logical, arguments using the standard charts and graphs.  They explain that the yield curve is not yet inverted (a recession predictor) but they can explain why it really is, or should be.

There Definitely Won’t Be A Recession

You can read commentaries and analyses from other respected economists proclaiming the economy is fine, is expected to get better, and there is no recession in sight.  They also use the standard charts and graphs to buttress their forecasts.  And after all, the yield curve is not inverted.

ECRI (Economic Cycle Research Institute), whose specialty is forecasting recessions, is not predicting one yet, even though its leading index is steadily declining.  The institute is probably being cautious after forecasting a recession in 2012, which never happened.  FTR is forecasting continued weak economic growth, but no recession.

Using The Commercial Vehicle Equipment Market To Calculate The Next Recession

Reading all the commentaries and analyses is confusing, so what can the commercial equipment market tell us about our economic future?  Well, our industry is a leading indicator for the economy.  I determined this years ago when my bosses assigned me the difficult task of finding the leading indicator for the commercial vehicle market.  After month of study I determined there was nothing in front of us, therefore we’re the lead car on this train.

My theory was confirmed soon after that when I attended a presentation by a General Motors economist and she said they track commercial vehicle sales closely because it is a leading indicator for the general economy.  This is not a new phenomenon.  The Dow Theory, developed in the 1930’s, states that the Dow Jones Transportation average is a key barometer to the future condition of the economy and the stock market. 

How It Works

We are going to construct a simple model based on North American Class 8 truck demand. We will take the peak month in the last two upcycles and then measure how long it took after that peak for the general economy to enter recession.

I know this model is so simple that a fifth-grader can understand it, but I like simple models and it does have logic behind it. Truck demand is very cyclical and the economy is also.  Therefore if truck demand is a leading indicator, it should always hit a peak before the general economy.  It also makes sense that trucks haul goods and if you need fewer trucks now, then you are hauling fewer goods in the future and economic growth should slow.

The Model

1. Peak Class 8 Production = October 1999
Recession Begins = March 2001
Gap = 17 months

2. Peak Class 8 Production = October 2006
Recession Begins = December 2007
Gap = 14 months

This time:
Peak Production = June 2015
Expected Start of Next Recession = August 2016 to November 2016

Because the current truck demand cycle is very similar to 1999-2000 (so far), let’s say the model is predicting a recession beginning in Q4 this year.  Hang on, we are about to go right into the Danger Zone.

1 comment:

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