GDP is high, and unemployment is low. Manufacturing is booming, and wages are
rising. So, everyone is joyous, correct?
Of course not, you are starting to see articles claiming that if things
are this good, a recession must be coming soon.
So it is time to again consider what the truck equipment
markets indicate about the timing of the next recession. In March 2016, I warned that based on
historical correlations, the decline in Class 8 truck builds foretold a
recession beginning in Q4 2016. This did
not happen due to the following factors:
-
The Class 8 truck market ended up suffering a
correction, but not a crash. Typically
when sales start to slide, they keep plunging.
Fortunately this time, they bottomed out in Q1 2017 and began a steady
recovery which continues today. It is
important to note that the FTR (Freight Transportation Research) models in
mid-2016 showed the market correcting but not crashing. That’s why our forecasts were much more
accurate than all those other one’s which predicted a market crash.
-
GDP for Q4 2016 and Q1 2017 were 1.8% and 1.2%
respectively. While not a recession, the
“economic plane” did dip close to the ground before pulling out of the dive.
-
Although the economy had failed to cycle much
since 2010, the Class 8 truck market continued to cycle through the period. The
substantial difference being that truck demand didn’t cycle as much as in the
past (a good thing), which is the difference between having GDP quarters of
1.8% and 1.2% growth versus a recession.
The U.S. economy has been expanding for over eight and a
half years; the third longest period since World War II. But this recovery has been characterized by
its slow, plodding growth and muted cycles.
The Good News: The economy is finally experiencing significant
growth again.
The Bad News: The economy is finally experiencing significant
growth again.
If we cycle way up, eventually the economy overheats and
cycles down causing a recession. But it
is even more difficult to predict the timing of the next recession under the
current unusual environment. If the Trump administration’s economic initiatives
work, then giddyap, we are going to ride this wave for a while. If this upcycle is the result of the
restoration of normal economic fluctuations or in the trade strategies fail, we
are quickly coming to an economic peak.
And this may be a return to the “old normal”. I believe that the slow, abnormal economic
growth of the past several years was the result of restrictive government
policies and businesses being too cautious and fearful after the Great
Recession. President Trump has loosened
those restrictions and business and consumer confidence is soaring for whatever
reasons. This may be just a huge economic
reset that took eight years to accomplish after the crash.
What Do
The Equipment Markets Indicate Now?
It is important to watch the truck and trailer markets
because they are leading indicators of the general economy. Class 8 truck sales is one of the key
economic leading indicators tracked by the economists at General Motors.
The Good News: The equipment markets and the economy appear
to back in sync.
The Bad News: The equipment markets and the economy appear
to back in sync.
As previously mentioned, the equipment markets continued to
cycle even though the economy did not change much. However, now the economy is vibrant, and it
is pushing equipment sales to record levels (if you factor out the Class 8
pre-buy factor in 2006). This is good in
that it shows the economy is healthy and getting back to performing
“normally”. It is bad in that the
equipment market, driven higher and hotter, will probably experience a perilous
drop before and during the next economic downcycle. This type of drop is
inherent in truck and trailer equipment and cannot be avoided.
Because of the significant impact of a recession on truck
and trailer demand, FTR cannot put a recession factor in the forecast. For example, in we forecast a recession for
2020, it would drive our equipment forecast way down that year. But if the recession occurs in 2021, then the
forecast for both those years would be highly inaccurate. So the assumption for the forecasts is for no
recession, even as the possibility increases due to the length of this recovery
and the surging economy. If the “master”
economists cannot predict the timing of the next recession – than neither can
we.
When
Is The Next Danger Zone?
Based on history, which doesn’t always repeat and
forecasts, which can be inaccurate in the long-term, when do the equipment
markets indicate a recession could begin?
If truck/trailer production peaks around June 2019 (the
current forecast), and recessions occur 13-18 months after that (based on
history), the “danger zone” would be July-December 2020, which is as good as
anyone’s forecast right now. The good
news is unless there is an economic or geopolitical shock, we
So, let the good times roll – for now.
