Thursday, October 13, 2016

The Economy Is Quiet – Much Too Quiet

Usually I have many more topics for economic blog posts than I have time to write, but not this time.  As I scan the economic and industry news, it is difficult to find any new trends or significant changes that I have not already covered. 

Back in May I warned that the “air was leaving the balloon.”  This prediction turned out to be true, but I never thought about what it might look like now.  It’s like the end of the birthday party when the balloons have deflated, all the cake is gone, and the pony’s been hauled away.  The kids are all standing around wondering what happens next.

It’s quiet, too quiet, eerily quiet.  It’s never supposed to be this quiet.  Is this like a horror movie? You know when it gets this quiet, something incredibly awful is just about to happen, but you have no idea what that might be.  Sure, Janet Yellen could jump out of a closet screaming “Interest Rate Hike,” but beyond that, what could be lurking?

The economy has been subdued for at least nine months now.  Some economists are claiming this is due to a “classic inventory buildup” and that things should get much better soon.  Inventory buildups are caused by businesses over-producing and over-ordering, because they anticipated sales to be better than they actually were.  They expected the demand trend to continue, but it fell short.

There are two issues to be concerned with here.  First, the economy wasn’t growing that great to begin with. So why did it slowdown, and why was this inventory buildup so pronounced? Is there a bigger problem with demand than we know?  Second, when you have a healthy economy, the inventory buildup is less of a problem because a typical return to a stronger sales environment eliminates it quickly, and a noticeable improvement in GDP soon follows.  I sense that our current inventory bloat is going to take longer than anticipated to burn off, because sales still are not at higher levels.

It appears the economy went into a gigantic holding pattern around March.  Some indicators flattened out at that time, and there was also a drop off in the Class 8 and commercial trailer orders and production beginning in April.  There were anecdotal reports of trucking fleets becoming much more cautious about future business conditions, due to declining freight demand and lower operating profits.

Analysts were encouraged when the Manufacturing PMI (purchasing manager’s index) finally got above 50 (the growth line) in March, after six months being under or equal to that value. Unfortunately, there has been only sluggish growth since then, with a “highpoint” of 53.2 in June.  The Non-Manufacturing PMI has been better, but inconsistent. The non-manufacturing sectors have been credited with keeping our heads above the recession waters.  Retail sales have been shaky except for solid months in April and June.  The chart below shows the three factors, I subtracted 50 from the PMI values to make it easy to see the “negative” values.  The retail sales values are the reported percentage changes.  The August numbers do not indicate a “bounce back” from the inventory correction. 

Of course the uncertainty of the presidential election is largely responsible for the economic quietness.  The candidates are polarizing and their economic programs vastly different.  Let’s assume the economy is a difficult jig-saw puzzle, the current player found the puzzle too perplexing and, at some point, gave up trying to finish it, but told us the picture on the table was pretty.  One of the potential new players will look at the current unfinished puzzle from new angles and try to fit new pieces to complete the task, but the strategy, and maybe the results, won’t change too much.  The other player would throw the current puzzle out the window, and then introduce a brand new puzzle.

But then in this stillness, comes a ray of hope.  Consumer confidence in September jumped to its highest level in nine years! Nine years!  And then it is casually mentioned that it is the “strongest reading since August 2007, four months before the start of the Great Recession.”  Oh no, the consumer never sees it coming. Do not open that door, please do not open that door!

 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.)