Super Gridlock is Super Good for Business

A panelist at the recent FTR (Freight Transportation Research) Transportation Conference reminded us that businesses like it when the government stays out of “their business.” He said companies were benefiting from the new “hands off” environment. He claimed this had improved business confidence, and, more importantly, business performance.

We have seen these conditions before, usually when power in Washington has been divided between the political parties, creating gridlock. Often this results in the government not being able to accomplish much, a “libertarian paradise.” Libertarians would argue that government actions to spur economic growth are often wasteful and ineffective. They also claim regulations, even for noble purposes, are often poorly designed and lead to harmful unintended consequences.

Our current jumbled, toxic, political environment, while harmful in many areas, has created a favorable business climate. This is beyond gridlock, this is super gridlock. Instead of two factions fighting for power, you have three. This is an economic and not political discussion, so I will not get into the motives of the Democrats and the divided Republicans.  

However, if companies love gridlock, they are absolutely giddy about super gridlock. Businesses prefer conditions that are stable and favorable and a government which does nothing to impede growth. And now the government is actually doing less than nothing.

There have been over 800 regulations cut or delayed in the first six months of the new administration. Furthermore, there has been a crimp placed on any new regulations. From a purely economic perspective, this is creating an extremely favorable business environment. It appears now that it is the government being regulated and not businesses.

Soon after the election, business confidence indexes spiked. At the time it was uncertain if this renewal of hope would have any positive outcome on the economy. Would survey results in December eventually turn into dollars? For a while, it looked doubtful, even as the survey numbers remained high. Now it would appear that we have the answer. Yes, the increase in business confidence is beginning to have a positive impact. We just had to wait; Tom Petty was correct, “The waiting is the hardest part.”

At FTR we constantly talk to manufacturers about business conditions, because manufacturing is so tightly connected to freight. Several producers from different industries said they noticed a definite upturn in business in June. A speaker at a recent forum I attended said his bank had noticed a recent surge in small business investment. Anecdotal information is always difficult to process, but now it looks like these statements were valid.

The ISM Manufacturing Index rose to 60.8 in September, the best reading since May 2004. Let this sink in for just a moment. The index says that U.S. manufacturing conditions are at the most positive level in 13 years. In addition, the ISM Services Index is at a 12-year high. My contact in the precision machined products industry says that business spiked near a record high in June, fell some in July, but recovered in August.

Some analysts are saying the hurricanes boosted the September ISM manufacturing number, so watch the October reading carefully. However, the inventory reading of the ISM was low. This means sales are running ahead of production, so production needs to increase. The hurricanes should not have a substantial hit on GDP, the experts say only 30 to 50 basis points in the short-term, with a boost later. The Wall Street Journal economists survey is forecasting GDP growth of 2.7% and 2.5% for Q3 and Q4, respectively. Add the 50 basis points back to Q3, and you get 3.2% GDP. (Now the first GDP estimate is 3.0%, then add .5 and you get 3.5% without hurricanes!) Not too shabby.

Oddly, the biggest hindrance to future growth is lack of workers. The official unemployment rate is down to 4.2%, and large numbers of people are out of the workforce due to opioid abuse, lack of technical skills, and disdain of manual labor. The trucking industry will face this challenge in a few months as more drivers will be needed to haul the growing demand for freight. This, and reduced productivity due to ELDs (Electronic Log Devices), could stress trucking capacity to the max.

The economy has increasing momentum entering 2018. If Congress is able to pass tax reform, it will give business another huge boost. However, don’t get too exuberant just yet, not with super gridlock still in place.