In Review
I developed the Model T Stock Trends Model around 2001 to predict swings in the stock market/economy based on cycles in the commercial trailer market. The model correctly predicted the 2008 downturn but has been unreliable since, as the economy did not experience normal cycles in the 2010s and was then disrupted by the pandemic.
Last Time
My previous post declared that the economy might be in
trouble since commercial trailer production was declining and orders were weak.
Based on this, I updated the Model-T to see what it indicates about the current
economic environment.
What the Model Shows
The 12-month moving average of trailer production began to
fall in November 2023. Historically, the model predicts a downturn will start
right now. However, except for the recent stock market gyrations, things appear
fairly stable.
What could be different with the model this time? Even
though the trailer market appears to be reverting to a natural demand cycle for
the first time in years, conditions were far from normal after recovering from
the economic turmoil in 2020. The Great Supply Chain Clog of 2021-2022 resulted
in tremendous pent-up demand in the market, resulting in robust production through
most of 2023. The depletion of this pent-up demand may have pulled forward the
peak production point a few months, and that inflection point is critical for
the Model T. Therefore, the natural market peak may have occurred in Q1 of this
year, which would predict a possible stock market drop/economic stress in Q4.
Interest Rate Factor
The expected quarter-point interest rate cut may mollify a
Q4 slowdown. However, some analysts claim this is too little – too late.
Regardless, it will take a few months for the rate cut to impact the economy.
The stock market has already reacted to the expected rate cut and is on a “sugar-high”.
This exuberance will not last if Q3 earnings fall below expectations, as some
analysts warn.
It is also significant that the FED is lowering rates due
to economic concerns while interest rates remain “sticky". The risk here
is that the interest rate cut will successfully stimulate the economy but increase
inflation beyond the current 3%. While not ideal, it is better than a
recession.
The GDP Forecasts
Here are some recent GDP forecasts. The Conference Board is the most bearish, signaling at least the possibility of a mild, short recession in the 2024 – Q4 to 2025 Q1 period. This forecast would be most consistent with the Model T.
Trailer production, despite the drop from last year,
remains decent, which is good news. However, orders have been weak for the past
three months, which has pushed backlogs to concerningly low levels. Orders
should remain tepid in August due to seasonal trends. Therefore, the September
and especially the October trailer order numbers will be critical in
determining the economy’s health in the first half of 2025. If October orders
are much below expectations, it may indicate a recession has already begun.
The Call
The Model T is signaling weakness ahead. GDP growth of 1%
or under in Q4 is likely, with GDP of under 1.5% in Q1 2025 possible. No
recession is expected at this point, but we have a tough six months or so
ahead.
