Monday, April 25, 2016

How are men’s underwear sales similar to the flatbed trailer market?

In the 1970s, former Fed chairman Allan Greenspan developed the “Men’s Underwear Index” as an economic indicator.  The theory is that increases in men’s underwear sales signal an economic recovery.

The logic is that men will forgo replacing their haggard shorts during a tough economy, but when a recovery begins, new skivvies are one of the first purchases a guy makes.  This index only works for men’s underwear, because women are usually much more diligent in replacing older undergarments. 

This index was recently back in the news as a report was released showing men’s underwear sales peaked in 2006, followed by three straight years of decline, with a bottom (no pun intended) in 2009.  Since then, sales have risen (no pun intended) steadily each of the last six years and are about 16% higher than 2006.

While the Men’s Underwear Index is an interesting economic indicator, I do not find it very useful.  For one thing, it is not as predictable as it was in the ‘70s due to the proliferation of styles and types of men’s underwear.  The “tighty-whities” and plain boxers were much more generic in price and durability, providing more consistency to sales and replacement cycles and, thus, the index.  And though there is high correlation, it has to be tightly tied to the employment numbers, which are already reported on a monthly basis.  This also means it is a lagging (perhaps more like a sagging) indicator, which means it just confirms what has already taken place.  By looking at the current graph of men’s underwear sales, I can determine that a slow and steady economic recovery has taken place since 2009, with good employment growth.  Nothing really new here.

Flatbeds are the men’s underwear of the trailer industry.  For whatever reason, during tough economic times, flatbed fleets will do whatever is necessary to delay replacing worn out equipment.  They will repair old trailers over and over again until the trailer is unusable.  When the economy starts to improve, there is tremendous pent-up demand, and flatbed sales take off and stay healthy until the next economic slowdown.

Flatbeds are also the trailer type most representative of the total U.S. economy.  Flatbed freight includes a wide range of products including industrial, consumer, and consumer-related goods.  This makes flatbed trailer sales a ready-made economic index of the U.S. economy.  It uses the same logic as the Men’s Underwear Index, but it is much more inclusive and expansive.  For example, the cut back in energy exploration is hurting economic growth.  This factor is also reducing flatbed freight and, therefore, flatbed sales. 

In addition, flatbed trailer manufacturing is very representative of “heavy” manufacturing in the U.S.  Factors that impact industrial manufacturing will tend to impact flatbed manufactures more than those of other trailer segments.  So it can represent the state of current manufacturing, to a degree.

Flatbed sales would also tend to be a better economic indicator than men’s underwear, because the flatbed trailer market is more sensitive to economic changes, meaning the cycles are more pronounced and easier to identify.  The underwear data is reported later and is often stale. 

What is the Flatbed Market Saying Now?

Here is a chart of flatbed trailer build since 1995 and the previous two recessions (blue bars):

Source FTR
Two important things are evident:

-         The flatbed market is subject to strong business cycles, and this market started a strong descent more than a year before the previous two recessions.  The market peaked this time in April 2015.

-         Flatbed demand hits bottom at the very end of a recession.  This is very consistent with the replacement cycle described earlier.  At the first sign of economic recovery, flatbed fleets need to replace badly worn trailers.

Flatbed trailer demand started to drop in July, a couple months before manufacturing in general began to slow.  It has steadily declined, but has stabilized some the last two months.  This is an indicator that needs to be watched.  However, you might want to buy some new underwear now, just in case.
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.)

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