The Trucking Market is Feeling Good - Will the Economy Follow?

As I entered the exhibit hall at the Mid-America Truck Show last week, I could almost hear the Truck Market singing:

I never seen such a beautiful day
Looked like everything is coming my way
Feel like a bird just leaving a cage
Looks like my luck is
Getting ready to change

Oh yeah, welcome to the show indeed.  After suffering through the Great Recession and the “not so great” recovery, the industry has shown some very positive signs lately and these were all evident in Louisville.

You could see it:

-          The hall started to fill up fast and by afternoon the place was jammed with people.  When you have to be careful to walk around people “inside” the vendors’ booths, you know things are rocking.

-          Companies featured newer, flashier, displays (marketing budgets are back!)

-          Vendor space was full, there were even a couple trailer manufacturers in the far West Wing.  There were some foreign manufacturers with displays, relying on interpreters to make their sales pitches.

You could feel it:

-          There was a “buzz” about the place, an aura of excitement when you walked through the doors.  The truck market was back and people were giddy.

-          Everybody was smiling again.  The handshakes were strong and plentiful. Nothing like an increase in business to lift people’s spirits.

-          It was loud.  You had to stand close to people and talk louder.  This added to the very positive atmosphere.

You could smell it – and what you smelled was money!:

-          There was business being conducted, there were real deals being discussed.

-          New products were in abundance, because companies now anticipate increased sales. Competition is back baby! Because there is something to compete for.

-          One manufacturer beamed that they were building a new plant after having to close two older ones when the bad times hit.

The sun just came out
From behind a cloud
Now I feel like shouting out loud
Hallelujah, let the sun shine in
I'm feeling alright again

And it’s no mystery why the mood is so good.  Truck OEM’s are increasing production due to strong orders and trailer OEM’s are following suit to a lesser degree.  Of course this is putting pressure on suppliers to keep pace.  This is “good” pressure however, that we haven’t seen in several years.

This good mood is also contagious.  One of the reasons for the recent increase in orders is “buyer confidence”.  Just as increased consumer confidence precedes retail sales, increased buyer confidence in our industry leads to truck and trailer orders.  We don’t measure this at FTR (Freight Transportation Research), but it is apparent that fleets are more confident of steady freight growth and increased business than they have been in a long time.  People in this industry talk a lot and small and medium sized fleets often take their cue from what the large fleets do.

I wore out nine pairs of shoes
Walking this old floor
Never sang nothing but the blues
Now I'm singing me a brand new song
Standing in a new pair of shoes

The better news is that because the trucking industry is a leading indicator of the general economy, the increase in business activity and the positive business mood should be prevalent in other industries by the end of the year.  If that is the case, the economy could be experiencing a real recovery before too long. Yes, it sure feel good, feeling good again!

Sure feels good feeling good again
Sure feels good feeling good
Feels good again

(Sure Feels Good lyrics – Elvin Bishop)

(This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

The Housing Market Is Cramping Up

The housing market keeps sputtering along.  While disappointing, this should not be surprising.  Housing was the last big segment to hit bottom.  This was a bubble-busted collapse. Housing had so far to fall that it did not hit bottom until the recession was almost officially over.  Housing starts were still dragging the bottom of the cycle months after the recession had officially ended. 

Consequently, housing started its recovery after other segments of the economy and has mirrored the trends in other industries.  It has been a long, tedious, series of fits and starts.  Just when you think promising growth has started, it stalls out.

Because of the housing’s impact on freight and the general economy, it’s a good time to check in on the state of this industry:

Housing Starts:

February Report: 907,000 (annual rate). -0.2% vs. January, -6% y/y

Trend: Housing Starts began to recover in 2009, but unfortunately haven’t gotten very far. 

Based on history and population growth, a healthy market now would be around 1.5 million starts.  This means that even when using December’s higher number, we are still 30% below where we need to be.  FTR is forecasting Housing Starts to average around 1 million (annual rate) in Q1 and then grow slightly each quarter.  This would make 2014 a good year compared with the last few, but still poor compared to the 1.5 million baseline.

Building Permits

February Report: 1,018,000 (annual rate). +7% vs. January, +7% y/y

Trend: Building Permits started to increase in October 2013 so it appears bad weather has hurt the total this winter.  Building permit numbers should continue to rise each quarter at a modest rate.

Home Builder Confidence

March = 47, February = 46, March 2013 = 44

Trend: The index had increased for eight straight months before declining significantly in February.  The index registered its second straight month below 50.  A reading below 50 indicates builders are negative about future market growth.

 

New Home Sales

January Report: 468,000 (annual rate). +10% vs. December, +2% y/y

Trend: Positive, but like Housing Starts, we have a long way to go.  New Home Sales have been very slow to recover and we should be above 700,000 in a healthy market.

Existing Home Sales:

February Report: 4.6 million, -0.4% from January, -7.1% y/y

Existing home sales are actually declining after hitting a peak in mid-2013.  They are back to where they were in 1998.

Home Inventories

March Report: Inventories are increasing moderately, but remain at very low levels. Inventories will have to increase to fuel a recovery and support normal sales levels, but sales are not sufficient to cause inventories to rise just yet.  This is a symptom of our cautious business environment.  Some analysts believe the very low inventory levels are holding back the housing recovery by pushing up prices and stifling demand.  Preliminary reports (NAR) have existing home sales up 6% in March.

Housing Prices

Core Logic reports prices up 12% y/y in January.  Prices continue to rise but are still 17% below the peak of April 2006. Also, 4 million homes returned to positive equity in 2013, but over 13% of residential properties with a mortgage still had negative equity at the start of the year.

The Big Questions:

Why are Housing Starts so low?

There are fewer first-time home buyers.  College graduates who would normally buy houses don’t have jobs, have high student loan debt and are delaying marriage.  Household formation was very low from 2008 to 2010.  It started to improve in 2011, but is still below the historical average.  There is large pent-up demand here, but without jobs and a growing economy this market isn’t moving.  Home builders do not need to build inventory if there are not first time buyers.

In addition many smaller builders were wiped out during the recession.  Those that survived are facing very tight credit conditions.  Large builders remain very cautious and are having problems finding enough skilled labor for the projects they have.

Why are Existing Home Sales So low?

Buyers are facing tighter credit, limited inventories, higher prices and higher mortgage rates.   You still have a high percentage of homes underwater, cautious buyers and sellers, and limited mobility due to a sluggish job market.

What happens next?

The housing market may
be taking a "squat"

Housing usually leads the economy, but it was the last sector to crash and thus has lagged the economy since 2009.  For housing to rebound, the general economy has to be functioning in a normal state.  There has to be growth and stability to support the housing market before it can flourish.

Compare it to a world-class distance runner who has a bad case of the stomach flu.  All the parts that make him world class are still functioning well.  His legs, his feet, his lungs are all exceptional. But he is not going to run very fast, nor very far, under these conditions.  Other parts of this economy: employment, financial, risk-taking, consumer confidence, are going to have to heal before housing has a solid base to launch.

(This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Raiders of the Lost Recovery

We Were Raided

Once upon a time there was a land where the people lived a very carefree life.  There was dancing and parties and frivolity.  People built houses and businesses and careers.  And the moneymakers took risks, even big risks, with no fear of any harm.

Then without warning the raiders came.  They stole, they killed, they destroyed.  The land was devastated.  Things people spent their entire lives building lay in ruins.  The people in the land were hurt and terrified.  Almost everyone had suffered some type of loss due to the raiders.  Those who had escaped the raid, felt fortunate.

Where Is That Recovery ?

The overwhelming emotion of the people was fear.  They were all afraid the raiders might return soon and destroy what remained.  Instead of working hard to rebuild the land they had, the people very slowly, very cautiously started to move forward.  Some rebuilt very slowly, some rebuilt much smaller and some reasoned it was not worth rebuilding at all.  There was no sense in taking any risk, since the raiders could return and destroy it again. 

The Great Cautious Recovery

Fear is one of the strongest human emotions and the Great Recession was one of the most fearful events this generation has ever faced.  And fear impacts economic decisions.  For a long time economists tried to downplay this impact, but the connection between economics and emotions is now an active field of study.

So now we have the “Caution Economy”.  It’s like a traffic light that is stuck on yellow. Things are messed up, no one has any experience dealing with this and it causes consumers and businesses to operate slowly and dysfunctional.

Everyone is overly cautious because we all came through this crisis together and now everyone is moving forward, very slowly, as a group.  It is becoming part of our culture.  Risk-taking isn’t valued in this economy, it is frowned upon.  The result is that in the fifth year of this economic recovery, progress is still excruciatingly slow.

It’s no surprise that various stimulus programs did not work as well as expected.  When we are fearful, we are not in the mood to be stimulated.  And historically low interest rates means the government is begging us to borrow money.  But we don’t, because we are still afraid we could lose it.

And we had legitimate reasons for not being more confident about the future.  The government does not give us confidence, the world economy does not give us confidence, and the financial markets do not give us confidence.  The government in many regards has made things worse by displaying a dangerous lack of knowledge of how businesses function.

We have been stuck on “slow” for so long that we are being conditioned to believe this is “the new normal”.  You can read articles every day that include: cautious, low-risk, modest, sluggish, etc.  We have repeatedly heard that businesses are “keeping a tight rein on spending” and this reinforces our own cautious behavior. Therefore the mass caution leads to a sluggish economy, which of course leads to more caution.  We are swimming in circles afraid to venture out too far because there might be sharks in the water.

A Cautious Transportation Market

This “Caution” economy has impacted the transportation market in several ways:

-         Very “choppy” freight demand has made it difficult to make decisions in the short-term or plan in the long-term.

-         There was significant over-capacity in the market that has taken an extended period of time to be depleted.

-         Equipment has been run a longer period of time which has disrupted traditional trade cycles.  This has occurred because trucks are being run less miles due to weak freight demand and trucks and trailers being run more miles due to the economic circumstances.

-         “Rehiring” has been slower for suppliers, support industries and non-driver fleet personnel because companies remember how painful it was to lay off workers when our industry was decimated by the recession.

-         Industry equipment purchases hovering around “replacement demand” levels. 

-         Part of the driver shortage might be the reluctance of workers to re-enter the industry and new workers to enter this industry after the big layoffs when the recession hit.

Signs of Life?

Thankfully we are seeing signs of life in the industry.  The recent increases in truck and trailer orders show that fleets are becoming much more confident of future business growth.  And confidence is contagious. As soon as some people begin taking risks, more people become comfortable doing the same.  Another factor is “pent-up demand”.  You get significant pent-up demand during periods such as this because even though fleets needed new equipment, they were cautious and “were keeping a tight rein on spending”.  Pent-up demand is tricky because you know it exists, but it is very difficult to measure.  The problem for equipment manufacturers is that pent up demand tends to be unleashed without much warning.  Once some fleets start to buy, they all start to buy.

Because trucking is a leading indicator for the general economy, the recent upswing in equipment orders is a very good sign for future GDP growth.  Although some recent economic reports have been negative, the bad weather conditions in December and January had a bigger impact on the economy than economists realize.  Look for the economic indicators and the outlook to improve in the months ahead.

(This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

There Is Actually An Employment Shortage

In December I attended the Chicago FED Economic Outlook Symposium.  During a presentation on the steel industry, the speaker noted that companies are having problems hiring enough production workers.  Then, during a presentation on the housing industry, the speaker noted that builders can’t find enough skilled tradesmen for the jobs available.  Finally, an auto industry analyst stated that there are unmet employment needs there as well.

This certainly isn’t good news for the trucking industry.  My company, FTR (Freight Transportation Research), is estimating the current driver shortage at 200,000 and, based on the presentations in Chicago, trucking fleets will not only be competing for workers inside the industry, they will be competing with many other industries.  And this situation will only get worse, considering the potential of stronger economic growth and that we are only at the start of the baby-boomer retirement wave.

I recently found a newspaper article from 2007 that predicted a huge worker shortage (in general) beginning in 2010.  While initially I found the headline humorous, the Great Recession did not eliminate this worker shortage, it only delayed it.  It would seem the worker shortage predicted in the article began in 2013.

But how can there be a widespread labor shortage with unemployment still near 7% (and “real unemployment much higher)?  One factor is “structural unemployment.”  Structural unemployment occurs when unemployed workers lack the skills needed for the jobs available or do not live in the part of the country where job openings exist.

The Great Recession created significant structural unemployment.  Many workers lost jobs they had worked in for 10, 20, or even 30 years.  Their jobs skills are either not transferable to other industries or not adequate in a changing, high-tech oriented economy.  In addition, the housing bust made workers less mobile.  It is difficult, in some cases impossible, to sell your house if you are “underwater” or if you live where housing prices are depressed. (I identified the structural unemployment problem created by the recession in October 2009, one of the first people to do so).

But structural unemployment cannot fully explain the labor shortage.  I believe there is a new factor which I will call “cultural unemployment.”  Cultural unemployment occurs when the jobs available are not desired by unemployed workers due to cultural patterns.  You could also call it “Ugly Job Syndrome.”  Factory and truck driving jobs now fit is this category.  These were desirable jobs a generation ago, but the culture has changed and now a percentage of the available labor pool is avoiding these professions.

Also, government policies have contributed to this cultural unemployment.  Cheap college loan money led to an over-supply of college graduates (and an under-supply of blue collar workers), and an increase in the social “safety-net” allows more people to eschew physical and more demanding labor. And the recent report by the Congressional Budget Office predicts that the Affordable Care Act will motivate people not to work full-time, if at all.

So as bad as you think the driver shortage is, it probably is even worse given the overall labor market.  And due to regulation, demographics, and economic cycles, it will

Time to train more truckers!

continue to exacerbate.  This is going to cause significant changes in the trucking industry as companies respond to the changing labor economics.  There is no single solution to this problem.  Yes you will see higher wages and shorter routes, but you will also see changes in the distribution system (more warehouses, perhaps) and more and different types of intermodal.  It will also force carriers and shippers to develop creative solutions that maximize the number of drivers and maximize the efficiency of these drivers.  This will take some hard thinking and analysis.  Time to start thinking now.

(The post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.

It’s Something Unpredictable - Even For Me

Another turning point, a fork stuck in the road

Time grabs you by the wrist, directs you where to go
So make the best of this test, and don't ask why
It's not a question, but a lesson learned in time – (Green Day)

My blog, Model T Stock Trends, debuted September 23, 2009 and this is 118^th post.  I started the blog three months after I was downsized and cast into the worst job market of our generation.  The purpose for the blog was to keep my writing and analysis skills sharp while I sought employment and to put these skills on display to potential employers.

I found a job, but the blog was not a factor.  I thought the blog would end at that point, but my readers encouraged me to continue writing, so I did.  I was recruited away for another job within a year. The blog was not a factor again, but I kept writing. And you kept reading. The blog has received over 62,000 total hits, with a monthly high of 3,059 in October 2012.

I have spent the past four years analyzing the economy, forecasting outcomes and writing about it.  And now someone has hired me to do economic analysis, forecasting and to write about it.  I am the new Vice President, Commercial Vehicles at FTR (Freight Transportation Research).  FTR is the leading freight analysis and forecasting firm in the transportation industry.  FTR was named winner of the 2012 Best Overall Forecast by the Chicago Federal Reserve.  It is an honor to be working with an organization of such

prominence.

Due to my new position, I have made the decision to suspend postings of Model T Stock Trends for now.  I will be blogging for FTR and there are some business issues to work out.  I may be able to resume posting at some point down the road.

I will continue to publish my humor blog, “Ake’s Pains”.  If you are on my mailing list and read the Model T Stock Trends but do not read Ake’s Pains, check the e-mail for instructions.

I cannot thank my loyal readers enough.  You kept reading, I kept writing, and as a result something great happened.  You have contributed so much to my success and I appreciate it immensely. Thank you. Thank you. Thank you.

It's something unpredictable, but in the end is right,
I hope you had the time of your life.

We Need This Economy To “Stroke Some 3's”

When we looked at the freight markets last December, I described it as “ugly”.  This ugliness preceded an ugly 1.1% GDP growth in Q1, 2013.  With the economy bobbing between a 1% and 2.5% GDP, it’s time again to check on freight.

Truck Freight

FTR (Freight Transportation Research) Truck Loading Index

August Report: +0.4%, July report +0.3%. August +6.3% year-over-year

Trend: Steady increase

Forecast: Good growth in Q4, slower in Q1, 2014

ATA Trucking Index

August Report: +1.4%, July report -0.6%. Up 6.9% year-over-year

Trend: Increasing. This is the largest year-over-year gain since December 2011

Rail Freight

September Report: Intermodal +4.4% year-over-year (monthly average) Carloads (excluding coal and grain) +4.9%

Trend:  Intermodal is red hot with the monthly average currently the second highest in history. Carloads are showing steady growth.

Forecast: Current trends to continue

Port Freight Activity (West Coast)

FTR Index

August Report: +4.3%, July +2.3%. +3.9% year-over-year

Trend: Inbound freight is increasing.  Outbound freight has struggled most of the year, but has bottomed out and is growing again.

Air Freight

Trend: Flat, but better than in Q1.  Air freight is down 3% year-over-year.

Business Inventories

July Report: +0.4%, +0.1% June.

Trend: July showed the largest increase in inventories in six months. Businesses restocked for anticipated increased business the rest of the year.  Wholesale inventories are flat however.

Forecast:  The Inventories to Sales Ratio is low.  Businesses need more inventory.  Any increase in sales will require more production, more goods and more freight.

What It Means

Do not get too excited about these positive freight reports. Both FTR and ATA say freight is outperforming the economy at this time.  This is because the sectors (automotive, for example) that produce freight are strong right now.

However, freight markets are in much better shape than there were last December.  Inventories are tight and this is creating steady freight demand.  The economy keeps cycling up and down within a tight range.  Every time it appears that a decent recovery is starting, it stalls.  The freight markets indicate that we are in another upswing.

Forecast

My Wall Street Journal Economic Panel (my seven favorite from the monthly survey) forecast a Q1 GDP of 2.7% (with a high of 2.9% and a low of 2.4%).  Based on the positive freight numbers, I believe we can get to 3% growth.  Of course this is assuming the government doesn’t create a crash and the start of the Affordable Care Act does not cause an economic disaster.

In the words of that great economist Dickie V, “We need somebody to stroke the three, baby”.  We need to pass the economic basketball to the greatest 3-point shooter of all-time, Reggie Miller, and let him fire away. 

We need to see "3" from the economy!

If we can get to around 3.2% GDP in Q1, then Q2 becomes critically important.  Every time the economy has bounced up, it has fallen back down.  If we could get consecutive quarters above 3%, then maybe, just maybe, we can call it a recovery.

When Will The Big Dog Take The Lead?

The housing market had been over-stimulated since 1995 and was on fire until the bubble burst in 2007-2008.  Housing was one of the last sectors to crash in the Great Recession, but when it crashed, it crashed hard.   Housing usually leads the recovery out of recessions, but many economists are becoming concerned because growth in the sector appears to be slowing.  So let’s check the numbers:

Housing Starts

August Report: 891,000 (annual rate). +0.9% vs. July, +19.0% vs. August 2012

Trend: The growth rate this year is slower than 2012.  Housing starts flattened out mid-year but now appear to be gaining some momentum.   Single family units are getting stronger, but multi-family units are decreasing.  My economic panel (Wall Street Journal data) forecasted 2013 housing starts at 980,000, so growth has been weaker than expected.

Building Permits

August Report: 918,000 (annual rate) -3.8% vs. July, +11.0% vs. August 2012

Trend: This indicates the new home market is still steady, but not strong.  The build rate may not increase much until 2014.

Home Builder Confidence

September Report: 58 (50 = Neutral) No change vs. 58 in August

Trend:  The index held steady after four consecutive monthly increases.  Builders are cautiously optimistic, but this optimism may be waning.

New Home Sales

August Report: 421,000 (annual rate) +7.9 vs. July, +12.6% vs. August 2012

Trend: Slow, steady, growth, but more measured than 2012.  New homes are not selling fast enough to stimulate the build rate.

New Home Inventory

August Report:  Steady, moderate, growth since mid-2012.  Inventory is still at very low levels.  Inventories will need significant growth to support “normal” sales rates whenever that occurs.

Existing Home Sales

September Report: 5.48 million (annual rate) +1.7% vs. August, +13.2% vs. September 2012

This is the highest volume since early in 2007 indicating strong growth in this sector. Prices are increasing, motivating both buyers and sellers.  Inventory of existing homes is shrinking and this could hamper future sales growth.

Housing Prices

July Case-Shiller Report: +1.8% vs. June.  Up 12.4% over past 12 months.

Trend: Prices have been steadily increasing since January 2012. They are still down 23% from peak.  The forecast is for another 12.4% increase in the next 12 months.

Commercial Construction

Trend: Commercial construction has been weaker in 2013 after displaying solid growth in 2012.  Construction of new retail, office, and hotel buildings should be much higher in the fifth year of an economic recovery.  If you looked at this number alone, you would conclude the economy is still in recession.

What It Is

Housing market growth slowed in the middle of the year after displaying strong growth in 2012.  It appears the sector is performing very similar to many of the industries that took big hits in the Great Recession. There was a strong rebound off the bottom of the curve, but at some point growth levels out and there is slow progress for an extended time.  Because housing was the last sector to crash, it is mirroring the general economy but still lagging it. 

What It Means

Housing is not going to lead us out of this lethargic recovery anytime soon.  However I don’t expect housing growth to stay this weak for much longer. New home sales are strong, selling prices are increasing and new home inventories are low.  There is still slack in the system (foreclosures, etc.). At some point the slack will be gone and demand will increase and stronger growth will return.  2014 should be a much better year for housing.

What Now?  

That the housing market is still lagging, instead of leading, the general economy is evidence that things are still messed up.  Our economy is a jumbled, malfunctioning, mess. Hopefully at some point the economy resets itself and a real recovery can begin.  Unfortunately my panel of economic

We need the Big Dog running!

experts from the Wall Street Journal is predicting less that average growth for the next four quarters: Q3 = 1.9%, Q4 = 2.5%, Q1 (2014) = 2.7%, Q2 = 2.6%.  We desperately need the “Big Dog” of housing to get up and lead the way, because that is when our economy runs the best.