Caught In A Sticky Situation

Where Ya Been?

This is my first post here since 2021 and my first independent post since 2013. When I began working at FTR in 2013, I didn't want to post anything inconsistent with the official FTR economic forecast, so it was decided I would repost my FTR blogs in this space. I retired from FTR in 2022.

But Why Now?

This blog began in 2009 and was based on the premise that demand for commercial trailers is a leading indicator for the general economy and the stock market. Although the connection has not been tight for many years, it may be changing now. If you are new to this blog, I explain stuff in basic terms – I don't try to impress you with my economic knowledge. I do want to impress you with how much of this you can understand. 

Where Are We At?

We've had a long period of brutal inflation that persists. The Fed wants inflation near 2% before cutting interest rates, but inflation is sticky and is currently stuck at 3%. 

How Did We Get Here?

The simple definition of inflation is: Too much money chasing too few goods. When goods are scarce, you are, in effect, bidding against other consumers to obtain those goods. This pushes the prices higher. When the price of cabbage becomes too high for you to buy, the cabbage goes to someone else willing to pay that price.

During and after the pandemic, the government injected a tremendous amount of extra money into the economy to help people recover. However, they poured in way too much—there's your "too much money." At the same time, the world's supply chain was slow to recover after being shut down and failed significantly to produce enough products to meet the surging post-pandemic demand—there's your "too few goods." This combination caused inflation to spike.

Then, the government continued to shoot money out like a water cannon. The Inflation Reduction Act increased the money supply, as did the infrastructure bill. Even college loan forgiveness increased the money supply because it gave those benefitting from it more money to spend.

Somebody in the government said while all that spending was going on (I can’t find the source) that the strategy was to “Spend our way out of inflation”). This has to be the most moronic economic statement of all time. But politicians make lousy economists, and economists make lousy politicians. The sad part is that the economic imbeciles spend the taxes we pay. Politicians are experts at getting reelected and not much else. 

The Fed’s End Game

The Fed should be credited with raising interest rates to the point where inflation has declined, yet the economy has continued to grow and create jobs. However, we are nearing the end of this chess game, where the next move can either win or lose the game.

Late last year, Wall Street expected the Fed to cut interest rates three times in 2024. This was equivalent to the Fed promising to give the "money people" a pony sometime soon in the future. However, inflation was very sticky – not at all transitory – ha! – and there have been no rate cuts yet. There has been no pony – and Wall Street has been pouting the whole time.

Inflation is at 3%, but the Fed wants it near 2% before a rate cut. The problem is that the economy is showing signs of weakness. Consumers struggle due to persistent inflation, higher interest rates, growing debt, and depleting Covid cash. The Institute for Supply Management Service Sector Index just entered contraction territory, indicating that consumer discretionary income is getting squeezed. In addition, the manufacturing sector has been woefully slow to recover.

If the Fed does nothing, mild stagflation (inflation persists, but economic growth is stagnant) could result. If the Fed cuts rates too soon, it risks jolting the economy back to life, which could reignite inflationary pressures. There is tremendous pent-up demand in the housing and business investment markets as buyers wait for interest rates to finally fall. This is a tough choice and a sticky situation indeed.

Wall Street is expecting a rate cut, finally the pony!, in September. This may still be too early, and there is the political element of cutting rates before the presidential election. The rate cut wouldn't produce immediate results but would be trumped by some as the end of inflation this time around. A more prudent approach would be to cut rates in November. 

What Does The Trailer Market Say?    

This brings us back to why I have emerged like a hermit from the cave. My premise for this blog is that cycles in the commercial trailer market precede changes in the general economy and stock market. This was true in the 2000s. However, the Great Recession rendered this, and all leading indicators, unreliable in the 2010s. In 2019, the economic environment was beginning to normalize, and then, BLAM! Presently, The economy is trying to shed inflation and showing some signs of returning to historic trends. 

Now, the commercial trailer market is flashing YELLOW. May orders were pathetic (the lowest since 2020), and the 2024 build forecast keeps sliding, now below the replacement level for the first time since 2020. Typically, June and July orders are the weakest totals of the year. If they are similar or even moderately higher than May, backlogs will fall to traditionally weak levels. 

The good news is that the market is forecast to recover some in 2025. However, that forecast assumes decent GDP levels, which are suspect if the trailer market continues to fade. Therefore, the commercial trailer market should be carefully watched for the rest of the year. If orders are strong in the traditional order season, October-December, the economy should be fine in 2025. If not, the new president, and now there will be one, could face an economic downturn as soon as Q1.