It’s Time for an Economic Celebration!

The U.S. economy is setting a record this month for achieving the longest period of growth in its history. The economy has been growing for 121 months, breaking the previous streak from the 1990s. This doesn’t surprise me. Everything about this recovery has been unusual, so the fact that it is unusually long is par for the course.

However, the reason this recovery has run so long is because the hole we had to climb out of was so deep. It’s called the Great Recession, as opposed to the recession of 2008-2009, for a reason.

-         It lasted 19 months

-         It’s regarded by some as the second worst downturn of all time

-         The unemployment rate reached 10%

-         Real GDP fell 4.3%

-         There was a global financial crisis

In trucking, it took over 10 years for freight volumes to reach their pre-recession levels. For commercial vehicles, the drop in Class 8 truck production from peak month to trough was 80% and 81% for trailers. Our industry is one of the most cyclical in the entire economy and suffered greatly from the downturn.

Some analysts are downplaying the length of the recovery because of the weakness of the growth rate over time. The average annual GDP growth rate during this expansion is a paltry 2.3%, which puts it dead last on the list of economic expansions since 2019 (the next lowest is 2.7%, in the 1990s).  I believe the substandard performance is mostly the result of the severity of the crash.

Imagine a cyclist is zooming down the road, hits a bump and crashes her bike.  As a result, she sprains her knee. How long before she is biking again? After some rest and pain medication, she is back riding at half-speed in a few weeks. In a couple months, she is back at full speed, as if nothing ever happened. (Sounds like the 2001 recession).

But then another cyclist is gliding through traffic and gets hits by a huge SUV. He ends up in intensive care with serious injuries, including several broken bones. His recovery is excruciating slow, with minor incremental progress. He moves out of intensive care to the hospital and eventually back home. The bones heal and physical therapy begins. Maybe he gets back on the bike in a year, struggling to pedal slowly. Because he is a dedicated cyclist, he eventually makes it back to full speed, but it takes years.

Those pessimistic analysts forget just how devastating the Great Recession was. If you were one of the 10% unemployed, searching for work in one of the worst job markets ever, you don’t forget.

From the optimists, there is much political debate about who gets credit for the record recovery. In my view, the Obama administration did a great job climbing out of the economic pit. It got everything stabilized and held tight reins on the economy, so it would not fall back into the hole. However, at some point you could stop climbing and start running. Unfortunately, it’s difficult to transition from climbing to running. It takes different skills and policies, and they remained stuck in one gear.

The Trump administration comes in and can clearly see we should now be running and not climbing any more. They put some track shoes on the economy, gave it a push, and shazam! So, the Obama Administration primed the pump for several years, and the Trump people pumped away. See there is enough credit to go around. Can’t we all get along?

Dark Clouds? 

Nothing lasts forever, not even the longest economic recovery in history. The last two recessions occurred as a result of shocks, bubble bursts if you will, in dot-com and housing. There are no bubbles visible now, but you never really see the SUV coming at you until it’s too late, right? 

Yes, there are plenty of dark clouds headed our way. The economy is slowing after hitting a peak. GDP is expected to dip to around 1.5% in Q2. Will it continue to descend, or will it stabilize? It would help immensely if trade deals with China, Mexico, and Canada get finalized soon. This would provide a momentary boost to the economy, enough push that I don’t anticipate any serious economic problems until late in 2020.

Party Time!

I don’t expect economists to celebrate this milestone, because economists

don’t celebrate much at all. But for the rest of us, let’s party! We had to go through the misery of the Great Recession, we deserve to celebrate this 10-year anniversary (plus a month) of its passing. Raise your glass! Shoot off some fireworks! Here’s to 121 months of economic growth!

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

We’re Addicted To Cheap Chinese Goods

In the early 90’s, the Clinton administration provided trade benefits to China. There was strong criticism against these moves based on China’s human rights violations. However, President Clinton argued that expanding trade would lead to better relations with the Chinese and eventually better conditions for the Chinese people.

As trade with China increased, the Clinton economic team realized something significant; they could achieve economic growth without increased inflation. Usually, economic growth spurs inflation, which the Fed tries to control with higher interest rates. This can eventually lead to recession.

However, in the Clinton 90’s, the economy grew without a recession because we were able to “import deflation” from China. The toaster that priced at $10 (made in Missouri) could now be purchased for $8 (made in China). Add up the savings from a variety of everyday purchases and you are stretching the family budget. Multiply the savings over millions of families, and poof! – much of the inflation in the economy disappears.

Yes, the toaster jobs also began to disappear in Missouri, but the dot-com boom was just heating up, so high-tech jobs were growing. This began the transition of the U.S. from a low-tech workforce to a new, high-tech workforce, a problem we still struggle with today.

You may consider “grow the economy and import deflation” a short-term strategy with long-term difficulties. However, in U.S. political cycles, you leave after eight years. So, whatever consequences are created become someone else’s problem.

The convenient time for this policy to be evaluated, controlled, modified, etc., would have been at the beginning of the Bush II administration. But, the dot-com bubble burst in 2000. Whoops! – there went many of those dot-com jobs, and a recession began in March 2001, followed closely by the events of September 11. Taking any action at that time which disrupted the economy or increased inflation (if you stopped importing deflation, for example) could have proved disastrous. So, the Chinese policy continued.

In 2000, Congress did pass legislation promoting more Chinese trade and, in

2001, China was admitted to the WTO (World Trade Organization). The hope was that this would lead to China buying more U.S. goods, thus reducing the now-ballooning trade deficit. But this move only accelerated the import of Chinese goods. The Economic Policy Institute estimates that 3.4 million U.S. jobs have been lost since the WTO action. We may have imported deflation, but we also exported production jobs. Somewhere along the line, that Missouri toaster factory was toast.

The Chinese imports increased through the aughts (00s). Economists were confused about how the economy could be doing well with U.S. employment growth so tepid, but it looks like the trade policy is partially to blame. With manufacturing declining and the dot-com sector slow to recover, there were few places to invest capital, so everyone poured massive amounts of money into the housing market.

After the housing bust and Great Recession, the new Obama administration could also not risk disrupting Chinese trade. The economic recovery was very fragile for a few years and never great during the entire eight years. So, the Chinese goods kept flowing.  The Chinese were fortunate that economic and world calamities prevented U.S. trade policies from being critically reviewed, which enabled the cheap Chinese goods to keep flowing to U.S. consumers for over 20 years.

The Trump administration reviewed the numbers and wondered how we ever got into this precarious position. Today, we find ourselves in a trade war, which involves much more discussion about intellectual property and opening Chinese markets to U.S. goods than about slowing the flow of products into the U.S.  Why? We might as well face it – we’re addicted to cheap Chinese goods. Yes, we love those low prices at Walmart and online too! We have been buying the stuff for 25 years and we are hooked. This is surely the “new normal”.

You might have thought the renewed interest in Chinese trade would have revived the debate about human rights abuses. How about those advocates protesting exploitation of Asian workers? What about the argument that buying Chinese goods enriches a communist regime that may do us harm in the future? Nope, nope, nope. Crickets! Why? We are addicted to Chinese goods like a junkie on crack.

And the addicts are agitated because their “fix” might increase in price 10% due to the tariffs -- a 25% increase would be horrible! Of course, the simple calculations for the tariff’s impact on prices are always overstated due to the law of supply and demand and the fact that consumers will seek substitute goods.

In this highly politicized culture, the Chinese tariffs will either destroy our economy or have very minimal impact, depending on your attitude towards Trump. Of course, the truth is somewhere in between. However, the tariffs and trade negotiations have greatly increased business uncertainty, which is always detrimental to the economy. Therefore, it is beneficial to the U.S., China and, yes, the cheap-Chinese-goods addicts for this trade deal to be signed as soon as possible.

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

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.

Brick and Mortar – It’s What’s Inside That Matters

Brick and mortar are dead …

In 2016, demolition of Rolling Acres Mall began. The mall opened in 1975 on 260 acres on the southwest side of Akron, Ohio. In its heyday, it featured 140 stores on two levels,1.3 million square feet of retail space, and 7,500 parking spots.

However, the mall’s demise began long before on-line shopping became prominent. Safety and security issues scared shoppers away. The mall was offered at auction in 2009 and received no bids, and the last retail store closed in 2013. It took a lot of trucks to haul away all that brick and mortar when they tore it down.

It is now rumored (there is a name on the proposed blueprints), that a new Amazon fulfillment center will be constructed on that vacant land. Amazon fulfillment centers are somewhat more than a million square feet, so it will be just about the same total flooring as the old mall. Naturally, it will only be one floor, but stand taller.

Brick and mortar lives!

And what will the center be built from? Brick and mortar are not dead! But it will take considerably less materials to construct the fulfillment center than to build a mall with 140 separate stores, including five large anchors. However, this will be a much more efficient use of brick and mortar due to the spectacular productivity going on within those walls.

Productivity is the key factor. If someone presented a business case based on Amazon’s system in 1994 (when Amazon started) it would have been quickly dismissed, because it would have been thought to be inefficient and unproductive.

But what about the books? Amazon selling books did not become profitable until its seventh year. You could say it practiced on books. Once it achieved a level of operational productivity combined with volume, the profits began to roll in, and Amazon determined that other products could be channeled through its system.

How productive is an Amazon fulfillment center? It has been reported that the Kentucky operation can process 426 orders every second (read that sentence one more time). In the old mall, if one shopper were present at every register in every store (adding a few registers at the anchors) at the same time and assuming it took two-and-a half minutes to process the transaction (including 30 seconds waiting in line), the fulfillment center would be 400 times more efficient. If the registers were only in use 45 minutes of every hour, the fulfillment center is 500 times more efficient and, if you factor in when the mall was closed at night…whoa, sorry, my calculator just exploded.

Amazon achieves this extreme efficiency by using the most advanced technology available including robotics and 14 miles of conveyor belts per center. It has also been reported that it squeezes maximum productivity from its workforce.

Now thousands of on-line retailers are striving to emulate Amazon, which had a huge head start and holds a dominant competitive and technological advantage. The U.S. is in a “warehousing boom” (lots of brick and mortar), as distribution centers spring up across the country. These centers also are high-tech because efficiency is critical to being able to generate profits and compete with Amazon and others. So, inside the walls of the fulfillment center is the pinnacle of efficiency and productivity; but once those cardboard boxes hit the outside world, peak efficiency stops. This is because the transportation/logistics sector is trying to figure out how best to deliver packages that “final mile.” (home delivery).

The transportation players should not be faulted for a slower response. On-line sales have exploded as the baby boomers’ lust for product selection and customization melded with Millennials’ need for convenience and immediacy. These are the same factors that influenced sales methods and distribution historically.

The Sears catalog, first published in 1894, provided people with a much wider selection of goods than was available at the old General Store and was an immediate success. Sears serviced the country out of a 3-million square foot warehouse and made so many efficiency improvements along the way that Henry Ford studied their processes.

Sears opened its first department store in 1925, which provided the convenience of having many different products available in one location, with the immediacy of taking the product home with you rather than waiting weeks for delivery. This concept was so popular that Sears store sales (more were opened) exceeded catalog sales in just six years, which I find remarkable when considering the pace of life back then. It’s probably comparable to the way Amazon is adding fulfillment centers today.

Digitization has revolutionized the news, music, and many other industries. The Internet took the Sears catalog and digitized it by a trillion. (It may not be a trillion, but I don’t have time to count every individual product sold on-line). And then products were able to be delivered in days, then a day, and now sometimes in hours.

It’s not surprising that logistics is trying to catch up with all the various problems that exist with home-delivering a growing number of packages faster and faster. There are reports of traffic jams in neighborhoods caused by all the delivery vehicles on the streets. (Wouldn’t it be great if all the packages were on one truck?) And then there are the porch pirates. (Wouldn’t it be great if there was a central location for neighborhood pick-up and delivery.) And there are numerous inefficiencies. For example, my mailperson delivered a football jersey to me one day at 8:30 a.m. and then returned to deliver my mail around 1 p.m. in the same van. I think I could have survived those four hours without the jersey – or anything else for that matter. (But then I’m not a Millennial.)

And just as Amazon uses the latest in technology to make the warehouse most

efficient, final milers are experimenting with drones, robots, and self-driving vehicles to deliver packages. Future technologies might even be developed to solve this specific problem.

Class 8 freight haulers have issues because they must service both traditional retailers and on-line sellers as the market rapidly changes. But when all those new warehouses get built, it should make the logistic system easier to navigate and better than it is now. There is speculation that the optimal store of the future (free standing) has a traditional showroom/sales space in the front and a large distribution center/warehouse in the back.

But the final mile problems will all get solved. We just need some time to figure out the most efficient and effective ways to do it. Why am I so sure of this? 

Well, history is on our side. At the start of the 20^th century, the major catalog retailers, Sears and Montgomery Wards, had a huge problem in that 65% of the population didn’t have access to their goods and the infrastructure to fix this didn’t exist. So, after moving the products hundreds of miles by rail, they couldn’t get them delivered the…, the…, wait for it…, the final miles. Yep, the goods market had a final mile problem, but eventually they got it fixed and sales exploded. If our ancestors could figure it out using the technology of that day, I’m confident we can too.

When Will We See Driverless Big Rigs?

The question I get asked the most by people inside, and outside, the industry is: When will there be driverless trucks on the highways?

This, of course, is a difficult question because it not only involves adaptation to technology, but a host of other complicated factors as well. 

But my answer is this:

You will see driverless trucks as soon as the general population accepts driverless cars. When people are comfortable riding in a driverless car, then they will not object to a fully-loaded, driverless tractor-trailer behind them on the highway.

I realize this is not a specific answer but providing an exact year at this point amounts to SWAG. It is difficult to calculate an adoption rate curve because, in addition to economics, there are cultural, political, and other issues to resolve.

I believe most people are currently fearful of self-driving cars. This fear will, of

course, be reduced by all the “self-adjusting/correcting” options (braking, parking, lane-assist, speed-adjust, etc.) available on newer vehicles. In addition, there will be public service campaigns trumpeting the increase in safety provided by self-driving cars. Reduction in accidents, deaths, and drunk drivers will be the main benefits. Improved traffic flow is also an expected plus. 

And traffic safety is of growing importance as millions of baby-boomers with diminishing skills share the road with the texting Millennials. Throw in increased marijuana legalization, and we all may end up demanding self-driving cars.

Personally, I know I will be extremely distressed the first time I am in a driverless car. I have never even used cruise control, because I must always be in total control of my vehicle. However, I do look forward to the day when I summon a car to take me to my doctor’s office. A robot will load me in the vehicle and another robot will lift me out. If I can adapt to this, I think other’s in my generation will also.

But the final push for self-driving cars may come from insurance companies. If you drive your car, your rates are $10,000 a year, but they fall to $1,000 if the car drives itself. “This is America, so it is your choice. We are not telling you what to do, but…”

Why is public opinion so important? Because Congress is not going to approve the use of driverless trucks if people are fearful. It may take years to even write the regulations. Of course if one political party writes them, they will be too lax, and if it is the other party, they will be too tight. But there will be extensive debates and lobbyists promoting various interests, etc.

You can argue that the financial incentive for driverless trucks is so significant it will overrun all the obstructions and objections: “It is so obvious that they have to pass it!” Yes, and the government is working so well, it is currently shut down. And I will refer you back to the history of legislation on freight weight and trailer size. “When is that 33-foot trailer legislation going to pass?”

Now, you can also argue that the truck will always need a “driver,” but that is based on today’s technology and logistics framework. Twenty years from now technological improvements in automation, robotics, and logistics adaptation may change everything. Maybe then you will just need an “attendant” to ride in the vehicle for emergencies. This could even spark a new form of ride sharing. “Ride in the truck for free from Kansas City to Memphis and call us if anything goes wrong.”

I do agree with those who say “platooning” will come first. This involves two or more trucks connected by automated driving technology traveling down the highway in a line, separated by a close, set distance from each other. Successful platooning will also help people to accept the self-driving truck concept. However, this still will need to be legislated, with regulations, etc.

And that’s why it is difficult to put a timetable on it. If you forced me to place a bet, maybe 2027. But driverless trucks will remain a hot topic of discussion until it ultimately happens. As I said, it is the topic I am asked about the most. I was actually giving my opinion on the subject to an anesthesiologist as he waited for me to go under before a recent medical procedure. So, it has to be an important subject because if something went disastrously wrong, those would have been my final words! 

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

Why The Last Mile Is Such A Big Deal

Why the last mile is such a big deal…

(The last mile refers to the final distance covered to get an on-line purchase delivered to your door. The journey from factory to your house may take over 7,000 miles, but the last leg of that journey is gaining importance in the transportation sector)

Think about a common, small-ticket item which you hate to purchase. A good example for me are windshield wipers, and, on a recent rainy drive to Pennsylvania, I realized it was time to change my blades.

The usual buying process for the product is as follows:

1.    Drive to the auto parts store, which for me is “not on the way” to anything, about a 10-minute trip one-way. 

2.    Find the wiper blade catalog which is dirty, roughed-up, and missing some pages. The large book is difficult to hold because it is chained to the shelf and there is no place to set it down.

3.    Find your car in this book. The book is not easy to read because the type is small, the pages are thin and the store lighting dim.

4.    Find the cryptic code for the wiper blade you need. Something like: FGR3T-47 and if you need two sizes: FGR4T-47.

5.    Search the stock of wiper blades trying to remember the secret code that you need because you can’t write it down.  The blades are not displayed in any particular order, so it’s difficult to find the right one.

6.    After searching for a couple minutes, you determine that the blades you need are not stocked in that brand.

7.    Repeat Steps 2 through 5. Usually you can find your wipers in the second brand searched, but if not, you need to repeat those steps for brand three.

8.    You finally find them and head to the check out. On at least one time in your life, you grab the wrong ones, foolishly confusing FGR3B-47 for the blades you wanted.

9.    Wait at the checkout counter as the cashier is on the phone having an in-depth discussion about the transmission on a ’68 Mustang.

10. Pay for your purchase and receive four grease-coated coins as change.

11. Drive home. Estimated time of total trip = 35 minutes.

Who needs that?

A Better Way?

I was running behind on things after returning from my trip and having difficulty finding time to go to the auto parts store. So, one day at lunchtime I Googled “windshield wipers.” The first website up was Walmart.com. Clicked, entered the make, model, and year, and was instantly presented with four brands of wipers at various price points. Selected the second-best brand and went to checkout. But I was $4.59 short of free shipping. What to do? No problem, the website showed me four related products, that would raise my total over the

Free Goods, Even!

threshold. I selected the Glass Water Repellent for $4.69, entered my payment information, and bada bing, bada boom, the purchase was completed in about five minutes.

I didn’t even look at the delivery information since I didn’t need the blades right away. So, I was startled to see the delivery guy scurrying across my yard (I work from home) with the Wal-Mart box the very next day. Alas, they had not delivered in 24 hours, it was actually 25.

Now today we consider this commonplace, we even expect it, but let’s ponder just what happened here.  What would be the reaction, if just several years ago I called the auto parts store and said this?

Here’s my car information. Now go get me prices on every brand you carry.  Then I’m going to choose one and have you process my payment over the phone. Then I want you to go pull my blades off the shelf and package them up for me. Yeaaah, I’m going to need you to deliver them to my house tomorrow. Oh, and I’m not paying any delivery charge. If you could do that, that would be greaaaat.

Now spread this hassle-free buying experience over millions of products and you can hear the collapse of the brick-and-mortar, as the last mile explodes. And, of course, this trend is accelerating. Millennials demand ease of purchase in everything, and baby boomers (like myself) are learning we don’t have to put up with the annoyances of yesterday, because there is really a better way. Everyone will eventually want it fast, easy, and free.  And the “last mile” will cease to be a common term, it will just be normal, standard practice.

The transportation/logistics network has been adapting to these consumer/cultural changes. The system is better than it was, but not optimal. Eventually, one can imagine a network of automated warehouses, serviced by a fleet of self-driving delivery vehicles. And drones, don’t forget drones. Lots of drones.

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.)