When Do We Need To Fear The Next Recession?

Imagine you are in a crowd of people cheering on a runner in a long-distance race. Your contestant is running at a hearty pace and is winning. But then you notice their speed has slowed some. The athlete is still running at a steady pace, and is still winning, but just not by as much. Some spectators believe this

is evidence the runner is exhausted and will soon be losing. Some are optimists and believe the competitor is just taking a break and will be back up to speed soon.  Others see this as just the normal behavior in running the race.

And such is the state of the U.S. economy. It ran at a hearty pace in 2018, but is expected to downshift slightly this year. Because the economy is slowing, several economists and analysts are predicting a recession will occur later this year.  Naturally, this has created concern and discussion in our industry. It is the topic I have been most asked about recently.

The recession proclaimers warn of the economy peaking, trade uncertainties, stock market volatility, an inverted yield-curve, etc.  This is causing some concern, so let’s look at the key issues:

-         The economy has peaked, so we are certainly on our way down

Yes, it looks as if the peak growth quarter was 2018Q2 at 4.1%. and has eased down from there. However, GDP had also peaked in 2014, averaging 5% over two quarters, and the economy slowed after that, but did not go into recession.

-         But the economy is over-heated, so it will cool rapidly

GDP growth for the year of 2018 was only 3%. This is what was considered “normal” growth for a long time, until we experienced 2% growth in recent years. The 2019 GDP FTR forecast is 2.6%, not exactly a deep freeze.

In addition, inflation is surprisingly mild, coming in at 1.9% in 2018, versus 2.1% in 2017. Usually the inflation rate is higher and rising before a recession starts. The Fed then must raise interest rates due to inflation and this puts the brakes on the economy.

-       The stock market slide in December signaled we are doomed

Many analysts believe the sell-off was due to a rookie mistake by the new Fed head. His misguided statements about future interest rate hikes created a market panic. He made backtracking comments in January - and voila! – the stock market is back on track.  False alarm – this time.

-        The yield curve has inverted

The indicator is tracked closely by many respected financial analysts. This is cause for concern, but perhaps more in the long-term. The other thing to consider is that many historical economic indicators were “shook up” by the Great Recession and are not as reliable as they were before.

-       The unemployment rate has bottomed out

This is also cause for concern, but the employment statistics were impacted greatly impacted by the Great Recession and still cannot be fully trusted. There is still some “slack” in the workforce. However, it is a fact that many industries are having difficulty finding more workers. Labor shortages restrict GDP because you can’t produce more if you don’t have more producers.

-       Tariffs and trade wars will crush the economy

Until these are settled, they remain a concern. However, the trade situation is far from the disaster predicted by many. Let’s assume that even if the impacts of the new trade actions are negative, that it won’t push the economy into recession.

What the Truck Equipment Markets Indicate

Class 8 truck and commercial trailer production is a valid economic indicator because it is often the first place in the national supply chain to experience a change in direction. However, it was not a reliable indicator in 2016. My post in March of 2016 said the Class 8 truck market was predicting a recession late in 2016. However, GDP was about 1.8% for that time period, so I whiffed. I whiffed badly. However, it would be highly unusual for the economy to go into recession until over a year after heavy-duty equipment production has peaked. Neither Class 8 or trailer build has topped out yet, although this is expected to happen in the next few months. This would indicate there is no chance of a recession in 2019.

So When, Then?

If truck/trailer production peaks in June 2019, the next recession, barring any wild-card factor, should not begin until October 2020 at the earliest. And it is important to note in this hyper-politicized environment, we usually don’t realize a recession has started until we are several months into it.  For mild recessions, sometimes the downturn has ended before we even realized it occurred.