Monday, May 15, 2017

Who Let the Economic Dogs Out?

The Great Recession was devastating to the U.S. economy. At its worst point, 9 million people were unemployed and the average household income fell more than 8%. In addition, the U.S. government took drastic action to prevent the financial system from collapsing.

The people hurt the most by this recession were the risk-takers. There were many of these, because money was cheap and the economy was hot. Of course, we remember the “bad” risk takers: the house flippers; the guy who built a big hotel on a street already lined with hotels. However, there were also many “legitimate” risk takers: the service company that bought new equipment and vehicles to expand its business; the manufacturing company that built a new plant because of higher sales.

Unfortunately, the recession did not discriminate. If you had taken on too much risk at the wrong time, you might be finished. My friend, Steve, left his corporate job in the early oughts (00) to become a consultant, the risk being giving up a steady paycheck for potential greater reward. He worked hard and, over several years, had built a successful enterprise. I admired his entrepreneurship, risk-taking, and results. Then the Great Recession hit and virtually dried up almost all of his revenue.

After “average” recessions, businesses would soon begin spending and hiring again, albeit at a reduced rate. Consumers would promptly resume consuming. This would create a snapback in GDP, and we would be on our merry way until the next downturn. However, after the Great Recession this did not happen, and there never was a snapback. Everyone was afraid that the financial system could fail and make things even worse. A spirit of economic cautiousness permeated our culture, both for businesses and consumers. People saw what had happened to the risk takers and became very risk averse.

People did not buy lots of new homes. People did not buy many new cars. People drove their old cars fewer miles (it took five years to get back to the pre-recession miles-driven high). Businesses did not hire people back. It takes more employees to build up sales than it takes to maintain sales. If a company is content with its sales volume, it does not need to hire additional workers. If a company has a growth strategy, then it needs more people, but this would involve taking risks. Most importantly, people did not start many new businesses, because that is one of the biggest risks you can take. Since successful new companies are a reliable source of new jobs, this also hindered employment growth.

Under more normal conditions, Steve’s customers would have started issuing contracts again. However, the services he provides are in some way related to taking normal business risks, so his clients didn’t  return even though the recession was over. Steve took a teaching job to get a steady, but much lower, paycheck. He still consults, but that income is a small fraction of what it once was, even after eight years!

The risk aversion has become part of our culture. When companies see other companies or competitors take risks, they are much more likely to take risks. Millennials witnessing the economic destruction of the Great Recession don’t want mortgages or even car payments, knowing that if financial disaster hits, they just need shelter and food to survive. The 2012 presidential election is a notable example. Even though economic growth was sluggish, voters overwhelmingly chose the status-quo over the “risky” candidate who might make disastrous changes.

All this risk aversion had a deleterious impact on the economy. We know now, due to the great benefit of hindsight, there was too much caution. The financial system did not collapse and we did not slide back into recession, or worse. If people had actually taken normal risks, the economy would have recovered faster and stronger. If the economy had grown just 50 basis points more each year from 2010 to 2016, imagine how much better things would be right now.

There were signs that risk aversion was fading in 2016: more business startups, more job growth, more houses built. Yet, this still did not lead to a higher GDP. The economy seemed destined to remain in an endless stupor, until an unexpected event suddenly created unbridled optimism, signaling it was time to the resume “normal” business activity and take some risks. If someone was just watching the confidence survey results in a vacuum, they would ask: Who let the dogs out? Who? Who? Of course, we know the answer is President Trump, however remember this was a political, not an economic,
How far will these puppies run?

Now the dogs are running around and barking enthusiastically, but are they going anywhere? My good friend, Miles, says the animal spirits of the economy have been released. He reports that the Precision Machine Products Association (PMPA) Sales Sentiment Indicator, “exploded up 40% from December’s already optimistic number.” This index is significant, because these parts go into a wide variety of manufactured products. A manufacturing executive said, in a recent nationally televised town hall, “There is optimism and excitement (in corporate America), more so than ever before.”

Now the big question: How much of this optimism will actually turn into profit. Where is the action? Where are the tangible gains? Well, I don’t have information on the entire economy, but I do have clear insight into the transportation equipment market. There has been a sizable increase in orders since the election. The truck and trailer manufacturers increased production significantly in March, and Class 8 truck OEMs are expected to continue to increase production throughout the year.

There is still reason for some caution, however, in that many of the orders placed are for delivery in the second half of the year. Fleets are showing strong confidence in the future sales, which is consistent with all the sentiment surveys. However, this also is a positive sign for the general economy, since commercial equipment is a solid economic indicator (you need to have more equipment ready to haul the increased freight generated by a growing economy). More truck and trailer orders would point to a strong economy later this year.

If being cautious knocked 50 basis points off GDP, what does this burst of optimism add? Does it just turn that around, adding 50 points? Does it cancel that out and add the same amount back on, a 100-point increase? Most economists don’t expect this confidence and risk-taking to have much of an impact this year. It is difficult to adjust a forecast based on those darn animal spirits. I made that mistake in a previous post, believing that the optimism would significantly impact Q1 GDP, which limped in at a meager 0.7%. Q2 is forecasted to be much better, however. It will be interesting to see how fast those economic dogs are running in the second half of the year. 

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Thursday, April 13, 2017

Holding Five Wild Cards and Not Knowing What’s Trump

Everything Changes

The election of Donald Trump as POTUS brought a pronounced shift in strategy, tactics and actions regarding the U.S. economy.  It’s almost as if President Trump is CEO of U.S.A. Corp and is managing the entire economy as a business entity.  This has never been tried before and therefore the degree of economic uncertainty has greatly increased.

Current Situation
-         Truck and trailer orders dipped before the election due to increased uncertainty about the outcome.  This is common and the economy usually also slows down due to the same phenomenon. Smaller fleets and small businesses get particularly cautious.  After the election fleets started ordering again, in volumes much higher than expected. Orders usually increase in October and stay elevated until December, as fleets place their requirements for the coming year. In 2016, orders for trucks and trailers did not spike until November (a direct result of the election), however orders have remained strong through March.

-         The economic indicators are improving, including the key, forward-looking ones. It is important to note, so far this is the result of an economy on a natural upcycle and not the result of President Trump’s policies, which have not been implemented yet.  Therefore, you should ignore the political rhetoric on this, both positive and negative, for a while). The economy is forecast to grow at a 2.4% clip for the first-half of the year, with potential upside based on the status of these positive indicators. Based on the delivery dates of the orders, trucking fleets are expecting a stronger freight market in the second half of this year.  

-         There is renewed economic confidence because, although the economy slumped some (1.6% GDP) in 2016, it did not go into recession and looks poised to resume growth. The monthly Class 8 truck build declined 54% from June 2015 to December 2016. Drops that steep almost always are connected to recessions, but not this time. Truck build has increased the last two months, and the jump in orders means the worst is over.

-         Consumer and business confidence is soaring. Consumer confidence is at a 16-year high and small-business optimism at a 13-year high. The Obama administration was viewed largely as pro-regulation and anti-business by many companies. With a business magnate like Trump in charge, businesses are expecting positive changes. Consumers are feeling better because the election is over, the job market is improving, and the economy is doing better than in 2016.

The Future Could Be Good

-         Some onerous regulations are being eliminated or delayed.  Trucking was a favorite regulation target of the previous administration. It is expected that most pending, non-safety related regulations will either be delayed, changed, or eliminated. In addition, future greenhouse gas standards on trucks and trailers could be modified.  Less regulation could lead to greater economic growth in the general economy.

-         Tax reform could help small businesses, including many trucking fleets, that believe they are over-taxed.  If fleets have more money to invest, this will help equipment sales and other sectors of the industry.
-         Increased infrastructure spending helps trucking and the economy. The investment in roads and bridges will increase freight and improve truck traffic flow.

-         Trucking is now viewed as a “favored” industry. It often appeared the previous administration viewed trucks as something that polluted the air and endangered the highways. On March 23, the president of the American Trucking Association, ten leading industry executives, and twelve truck drivers were Trump’s guests at The White House. They discussed issues affecting trucking. They also brought along a high-tech truck/trailer combination in which the President was photographed sitting in the driver’s seat. This would indicate there will be a much friendlier business climate for the industry.

The Future Could Be Bad

-         NAFTA renegotiations could create problems.  For the most part, NAFTA logistics has worked well for the benefit of the three countries involved. The optimal logistics routes and systems have been established and utilized. Some products cross borders multiple times before sale. Changes to this system, and unforeseen consequences, could disrupt supply chains and cause major issues and problems for the transportation industry.

-         Trade agreements will be renegotiated with China and other countries creating the potential for multiple trade conflicts, and even trade wars, if negotiations turn sour. This would have a deleterious impact on the economy, exports, and freight.

-         Interest rates will probably keep rising. Interest rates were kept artificially low for many years after the Great Recession. Now rates are gradually being increased. At some point this will discourage borrowing and put a crimp in economic growth.

-         There is a great deal of uncertainty about the entire Trump presidency. There are master plans to bring manufacturing jobs back to America. There is a new strategy to deal with conflicts around the world. There is a new immigration policy. There is still a looming healthcare crisis to deal with.  Missteps in any one of these areas could lead to an economic downturn.

What About the Economy?

-         The economy was improving before Trump took office, so he is not responsible for what happens in Q1, and he probably won’t have much impact on Q2. So please ignore the press reports which over-dramatize this.    Likewise, the impact of a “Trump Bump” on the U.S. Stock Market is also exaggerated. However, there is some positive impact to increasing consumer and business confidence on an economy already gaining steam, similar to giving a push to an object already in motion.

-         Most economists don’t expect the economy to grow more than 2.5% in 2017. There is some upside potential if the confidence numbers turn into actual dollars spent. Most of Trump’s plans for job growth and reforms will take time to implement, meaning the impact would be in 2018 or later. 

Other Industries Beyond Trucking

The transportation industry is not unique and is tied to almost all sectors of the economy is some way, so I would conclude that many factors impacting trucking and impacting other industries as well.  The expectation of less regulations, lower taxes and a better business environment is boosting business confidence.  However, this confidence is in future conditions, therefore the orders and investments placed today will need to yield rewards at some point.

Freight Forecast

FTR is forecasting Class 8 truck freight to grow by 2.9% in 2017. This is a healthy increase over the 1.3% growth rate for 2016. The freight forecast is consistent with the economic outlook above assuming the manufacturing sector continues to strengthen.

Equipment Forecast

A moderately growing economy, generating modest freight growth, will support a basic replacement demand of trucks. Class 8 truck builds are forecast to increase 1.6% in 2017. Dry Van trailers had a robust year in 2016, as fleets are still replacing old trailers whose trade cycles were extended due to limited use during the Great Recession. Trailers production is expected to decrease around 7% in 2017, but still be historically strong. The mandate to use Electronic Logging Devices (ELD) which automatically record driver hours, is expected to decrease truck productivity and increase demand for new trucks (and some trailers) at the end of 2017 and into 2018. If this impact kicks in earlier than expected, 2017 demand will be higher.

Too Many Wild Cards

The biggest impact of the Trump presidency right now is a pronounced increase in uncertainty. It’s like playing a whole new card game for the first time and being dealt five wildcards. There are so many new factors in play which could have a significant impact (either way) on the economy and freight
markets. If all of Trump’s economic plans work brilliantly, the economy would grow at rates not seen in years. Conversely, if Trump makes some big mistakes, the negative economic impact could be severe. Therefore, this is now an environment with a much higher upside and much deeper downside than before the election.

Monday, March 20, 2017

Is the Gopher Moving From Caution to Confidence?

Economic calamities result in changes in micro-economic behavior which can last for years. My grandfather had accounts at eight different banks, just in case seven of the banks failed; my grandmother dutifully recycled her aluminum foil, 25 years after the Great Depression had ended. People fear that bad times might return, which causes them to be cautious for an extended time.

Likewise, the Great Recession (of course not nearly as traumatic as the Depression) ended only eight years ago and continues to impact micro-economic behavior and thus, macroeconomic performance. Exacerbating this impact was the weak, inconsistent recovery which followed.

Businesses and consumers emerged from our recent calamity exhibiting significant caution. Businesses witnessed customers and competitors getting washed away in the economic tumult. Almost everyone knew someone who had suffered a significant economic loss during this time. In recent, milder recessions the economy snapped back, and this short-term caution was replaced by renewed confidence, and economic behavior quickly reverted to pre-recession norms.

However, that has not happened, as of yet, this time. When you add in the cultural changes taking place due to the Millennials and new government policies over the last several years, the economic behavior changes are significant.

I initially resisted the idea of a “new normal” when this was suggested by some economists a few years ago. I argued that it was more like a “new abnormal,” which suggested that we would divert back to the “old normal” at some point. However, this transitional period has lasted too long, and too many factors have appeared for economic society to ever return to conditions of the mid-oughts.

This recovery period has been characterized by over-cautiousness and under-confidence. It is the Gopher Economy, with businesses and consumers sticking their heads up to move forward, then diving back under the ground at the first
sign of economic distress.

The high cautiousness combined with cultural and governmental factors have resulted in the following changes:

-         Home ownership percentages remain lower. It is much less risky to own a home than to rent. The recovery has not produced enough high paying jobs. Add in student loan debt, and Millennials cannot afford houses, are not getting married, not producing children, etc. These factors are muffling the housing recovery, which is usually a main driver of economic recovery.

-         Labor participation rates are down. The top end of the demographic scale got hit with huge layoffs during the recession. Older, displaced workers don’t have enough time to learn new skills, and they are much less likely to move to where new jobs are available. Some workers entered expanded disability programs, and some retired prematurely. On the other end, many Millennials have entered the workforce at a much lower level than expected, because the recovery has not produced ample opportunities. The government has expanded the “safety net,” which decreases incentive to work. In addition, some younger workers eschew manual labor positions, making it difficult for some manufacturers to fill open jobs. Not having these older and younger people in the workforce also hinders economic growth.

-         Millennials are less likely to own cars. Car loans equal debt risk, and caution works against this. High student loan debt and lower paying jobs limit the funds available for transportation. Uber and ride-services limit the need. The DOT Miles Driven measurement lagged for an extended period during the recovery, finally resuming a more normal growth rate in 2014.

-         Unemployed workers are much less motivated to move cross country to take jobs, because of the risk that the new job may also end. Cautious workers stay put. However, many Millennials are moving into the downtowns of large cities and saving money by sharing living expenses and reducing transportation costs. Now some jobs are being moved into the cities to attract these workers, so you actually have some jobs following the people, instead of the other way around.

-         Small businesses have been very reluctant to spend money on expansion or new equipment. The slow recovery and increased regulations have held profits modest. The inconsistency of the recovery has kept business owners cautious.

-         Banks have been more cautious in making loans. Requirements have tightened.

-         This economy lacks risk takers, entrepreneurs, new business start-ups, and new industries…the types of companies which create jobs.

Impact on the Transportation Equipment Markets

The biggest impact of the Gopher Economy has been on medium-duty work trucks, the types of vehicles used by many small service and construction businesses to transport their equipment, materials, and supplies. The market has grown modestly during the recovery, but much less than Class 8 trucks and trailers. Small businesses continue to manage their companies cautiously, avoiding risk, just in case the recession returns.

In December, I wrote about the boost in consumer and business confidence since the election. Many economists warned, at the time, that this was more of an emotional reaction and this confidence would soon fade; however, the opposite has occurred:

-         The Conference Board Consumer Confidence Index is up another 7.7 points since November.

-         The University of Michigan Index of Consumer Sentiment gained another 5.6 points from November.

-         The Gallup U.S. Economic Confidence Index jumps to +16, 8 points higher than November.

-         The National Federation of Independent Business is up 7.3 points since November, its highest level since 2004.

However, confidence surveys are traditionally unreliable predictors of future action (i.e. actually spending money). Still, the large increases in these indexes are hard to ignore. They would indicate the economy could be moving from caution to confidence, and this has very positive indications for future economic growth.

It took a world war to shock the economy out of its stupor after the Great Depression. Did it take a landmark election to shake the ground and cause this economy to emerge from its hole and start moving again?

  This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Monday, February 20, 2017

Scoring Some Economic Touchdowns

The previews of the Super Bowl indicated it would be a very close game, between two evenly matched teams. These predictions turned out to be accurate as we witnessed the first overtime game in Super Bowl history. Based on the matchup, I also expected the score to be very close the entire game, with no team being able to dominate the game for very long.

Of course, that assumption was wrong, very wrong. The Falcons had the
momentum in the first half and built a big lead, however the Patriots had the overwhelming momentum in the second half. “Momentum” is an intriguing concept in sports; it can’t be seen, but the results are obvious.

For the first time in years, it appears this economy has some positive momentum. At the beginning of this long, slow recovery, the manufacturing sector produced the growth, while the consumer side was sluggish. 

Fortunately, just as manufacturing slowed, consumer activity increased. Now, the consumer sector is maintaining its progress, and manufacturing appears ready to regenerate after an extended rough patch.

I had warned in 2016 that the economy was entering a danger zone because Class 8 truck sales were dropping after a high peak, an indication of a future significant economic downturn. I said, if the economy made it past November without a recession, there was potential for stronger economic growth. The economy struggled in Q3, but made it through the danger zone basically unscathed. Now the Class 8 truck market is stabilizing, a very good sign for the economy in 2017.

A review of the key sectors:

Consumer: Retail sales were up 0.6% in December. The economy continues to create jobs at a steady pace. Personal income is rising. The consumer services sector also continues to do well. The National Retail Federation forecasts that sales could increase up to 4.2% this year.

Manufacturing: The ISM (Purchasing Manager Index): January’s reading is 56%, the highest since November 2014.

Housing: While nobody was paying attention due to the election and other news, the housing market had a solid 2016. Housing starts increased 4.9% over 2015, and that momentum is expected to continue entering this year.

Energy: The new OPEC agreement has increased and stabilized the price of crude. This has significantly increased domestic drilling and exploration. . Of course, it is not back at previous levels and is dependent on crude prices remaining somewhat stable.

Economic Indicator Indexes: Both the Conference Board – Index of Leading Economic Indicators and the Economic Cycle Research Institute – Weekly Growth Index are indicating increased economic growth in the next six months.

Commercial Vehicles and Freight: Class 8 truck orders have improved since October, and production is positioned for a moderate increase over the late-2016 slump. Commercial trailers have also stabilized after some expected market weakness the second half of 2016.

My Leading Economic Indicators: I track 17 forward-looking indicators. Back in August, 3 were positive, 5 were neutral, and 9 were negative. This translated into a 1.9% Q4 GDP. Currently, 10 are positive, 4 are neutral, and 3 are negative.

What About a Trump Bump? 

I do believe the election has had an impact, but not in the way most people believe. I contend that businesses (especially small businesses), and some consumers, held back spending in the three months prior to the election due the fearful uncertainty created by a caustic campaign. Once the election was over, this caution faded, spending resumed (with maybe some pent-up demand), and the economy got a boost.

While consumer and business confidence have risen significantly since the election, it will take time for this confidence to translate into actual dollars. However, this confidence can make a difference if it provides even a nudge to an already accelerating economy. It is important to note that all the indicators mentioned above were measurements taken before the transfer of power.

The Forecast

The Wall Street Journal Economist Panel average is for 2.2% GDP growth in Q1 and 2.4% in Q2. FTR (Freight Transportation Research) is at 2.7% and 2.3%.

The Call

This economy does have momentum. Will this produce some “economic touchdowns” in 2017? I like our chances based on the solid improvement of the forward-looking economic indicators, I think it’s possible to increase 100 basis points from the 1.9% of Q4 2016. Take the “over” on the predictions, and look for around 3% growth the first half of the year.

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.)

Tuesday, January 24, 2017

Flat Lines – Very Flat Lines

When the smoke began to clear from the economic crash known as the Great Recession, economists hoped for a V-shaped recovery. In a V-shaped recovery, the economy recedes but then snaps right back after the economic shock.  When the economy starts to revive, there is a big boost in business and consumer spending, leading to rapid job growth.  This spurt in activity is similar to people being cooped up after a long winter and then frolicking on the first warm day of spring.

At that time, some economists warned that recessions caused by shocks to the financial system, as was the case here, often take many years to recover from.  They cited Japan’s “Lost Decade” as an example.   More optimistic economists rejected this argument, saying the U.S. economy was much studier than Japan’s and would bounce back much quicker.

Many other economists predicted a U-shaped recovery.  In the U-shaped recovery, the economy recedes, stays sluggish for some time, and then begins a strong recovery. 

Well, we definitely didn’t get a “V,” and we couldn’t get a “U,” either.  Unfortunately, the freight sector did suffer a “lost decade” in that it took ten years for freight levels to match pre-recession highs. Manufacturing employment also has not yet recovered, but automation and globalization have also restricted this number during the time period, so comparisons are difficult.

So, what do we call this long, slow slog of a recovery?  I propose labeling it the “Division Bar Recovery” because graphically there is a slanted vertical line with a long horizontal line attached to the right of it. This represents the economy making a small recovery then flat-lining for an extended period.

Analyze this!
This concept of a long, flat line (let’s say around 2% GDP growth) is intriguing.  Sure, there have been some ups and downs from quarter to quarter, but, get far away enough from the graph and look at it in its historical context, it’s a flat line.  This means economists have been trying to analyze a flat line for around five years! 

Data is collected, analyzed, graphed, and trended. We want to see trends and get paid to see trends, so therefore, we do see and report on trends. Thus, the economic growth line is studied intently and minutely, and this leads to:

“Whoa, the line is going up! Something good is happening.”

“Warning, the line was going up, but now it’s going down! It might not stop.”

“The line went up, then it went down, and now it’s back to the middle. It is not expected to go up, unless it goes back down.”

Frankly, you can’t fault economists for doing this.  To quote a popular television commercial, “If you’re an economist, you analyze data, it’s what you do.” Economists have had to deal with a unique economic environment, combined with broken, unreliable economic indicators. This has made forecasting anything even more challenging than normal.

However, even though the economy has not cycled much, the Class 8 truck market has continued to cycle as in the past, with a high peak in 2015, and a reasonable bottom (down around 35%) expected in 2017.  How this happened is still a mystery.  If you would have asked me a few years ago if the truck market could still cycle if the general economy didn’t, I could have given you at least five reasons why it would never happen. But, of course, it just did. I’m sure analysts in other industries are dealing with their own anomalies.

In addition, historically, the demand for commercial trailers was highly correlated with Class 8 trucks as is highly logical.  Except that in Q3 2015, demand for trailers stayed strong while Class 8 demand began to plummet.  The primary reason for this is Dry Van use was so low during the Great Recession, old units were not replaced, that many trailers were inactive for an extended time which altered the trade cycle.  This resulted in a huge pent-up demand for van trailers, which has continued to prop up sales.  We see similar pent-up demand in the auto market, because cars are being driven longer due to the Great Recession and the subsequent weak recovery. It messed up the trade-in cycles here, also. What happens in these two markets when the pent-up demand runs out? No one really knows, because there is no trend data to go by and it is difficult to accurately measure pent-up demand.  Auto sales are forecast to fall 5% this year, and Dry Vans to drop 15% (FTR forecasts).

Tracking this economic recovery is like watching a movie that has no plot. Sure, lots of stuff happens, but it is all unrelated.  The action goes nowhere. You end up totally confused by what’s happening and are highly uncertain about what will happen next.

Economists remain perplexed in this environment. If you look back over the past several years, you see a straight line. If you look at the current conditions, you see no trends. There are no discernible factors which will change current conditions in the short-term.  Therefore, your forecast must be…wait for it…a straight line.

If the economy were a person, he suffered a major trauma during the recession, started to recover, and then went into a coma.  He has flat-lined at a certain level, but his vitals are good. He is not dying, yet he is not thriving either.  An “economic coma” is a good description for the past several years.

Now there is a new physician, Dr. Trump, proposing to inject the patient with a new drug: a mixture of new and old chemicals. Will the patient come out of the coma and start to thrive? Will the injection make the patient ill? Will the medicine have any effect, or will the coma continue?  All of a sudden, this movie has a plot, with heightened drama and some tension. Stay tuned.  
 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.)