A year ago, Dr Bob Dieli, president & founder of RDLB Inc, predicted the economic mood for 2016 by leaving the audience with some lyrics from “Blank Space,” Taylor Swift’s #1 Billboard hit: It’ll leave you breathless, or with a nasty scar.
It was intended to reflect some of the uncertainty that Dieli thought was facing the trucking industry and the heavy-duty aftermarket.
“I think it turned out to be a pretty good description of the election,” he said. “Some of us were breathless and some of us have nasty scars. Some of that is going to be part of the issue going forward.”
But overall, he believes 2017 will get off to a “strong start,” based on his projections for Truckable Economic Activity (TEA) to improve from the growth in the first three quarters of 2016 (1.8%, 1.2% and 1.6%).
“Consumption, buoyed by rising consumer confidence, is expected to continue to lead TEA growth,” he said in a presentation, “The Economics of the HD Aftermarket,” which he shared with Bill Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago. “On the investment front, residential construction should remain in the forefront. Headwinds elsewhere appear to be abating. The recent sideways trend in exports is not expected to change for most of 2017. With consumption still strong, some pick-up in imports is likely in 2017. State and local structures will be the key to whether the government sector is a net plus in 2017.
“The expansion phase of the business cycle appears likely to continue through 2017. Domestic events, mainly those surrounding fiscal policy, are expected to have the most effect on TEA over the course of 2017 and 2018. The composition of TEA growth will continue to change. We expect improvements in Truckable Fixed Investment and Truckable Exports. We think they will both do better than they did before. The adjustment to structural transformation will continue—of special concern is the implementation of the ELD regulations.”
He said the Enhanced Aggregate Spread is an indicator of the direction of the economy and the first part of what he needs to make a forecast. TEA is a subset of the economy and has its own set of characteristics.
“We were not surprised to see the numbers (in 2016),” he said. “We had some trends going on and components that made us feel this forecast was pretty much what it should have been. We see expansion through at least the third quarter of 2017, if not well into next year.”
TEA has five components: consumption 45%; investment, 24%; exports, 14%; imports, 10%; and government, 7%.
“It’s based on the concept that most everything spends time in a truck,” he said. “It takes the part of GDP that spends time in a truck. Freight has to get from the dock to wherever it’s going, so the arrival of merchandise on our shores creates demand for trucks. As a consequence, we include it in our calculations.
“TEA is an early participant in recessions. So we spend time figuring out when a recession will happen. The hit to TEA was quite severe in the last recession in 2009.”
But we’re a long way from a recession. The current expansion period, which started in June 2009, is now the third-longest in American history behind March 1991-March 2001 (120 months), February 1961-December 1969 (106 months), and November 1982 to July 1990 (92 months).
“TEA and GDP tend to track each other, with TEA generally outperforming GDP in expansions,” he said. “The flip side is that it severely underperforms GDP in recessions. The expectation for rising GDP growth will be reflected in TEA growth. As a consequence, the Aggregate Spread is remaining positive. We still anticipate TEA growth will be positive and probably slightly larger than it was in 2016, in part because of some of the aspects relating to business and consumer confidence we already saw in the fourth quarter.”
He said that when TEA goes up, drivers get hired, and when TEA goes down, drivers get fired.
Truck transportation employment has been on a steady rise since the middle of 2016.
Dieli said hiring patterns are both timely and reliable indicators of trucking activity. He said that as of November 2016, total employment was 1,472,700, with general freight accounting for 69% and specialized freight 31%.
“While these data provide an excellent perspective, they do not include the trucking-related hiring at firms that are not in NAICS code 484,” he said. “For example, the drivers at Walmart are counted under retail employment.
“Looking at the level and trend of employment is only the first step. Previously, the level and trend of hiring correlated well with the level and trend of trucking activity. We think that the ELD mandate will materially affect how, where, and why freight moves by truck.”
He reminded the audience of Stu MacKay’s oft-repeated mantra: “This is not your father’s trucking business.”
“Structural change has been the rule,” Dieli said, “and things today are different from what they have been.”
What does the Trump Administration mean for the economy? What kind of impact will it have this year and going forward?
“I’ll tell you the honest answer: I don’t know,” Strauss said. “The reality is, I don’t think anybody knows. There are certainly proposals that have been stated during the election campaign. Whether those are the ones that are going to be pushed heavily … It’s also an understanding that there are equal branches of government, and he’s going to work with Congress, many of whom have signed a pledge not to increase the deficit. Given the kind of stimulus spending he has talked about, it’s going to be tough to balance that. There is discussion about tax-policy changes, lowering the corporate tax rate. But how do you do that and make it revenue-neutral? Do the rates come down to 25%, 20%, 10%? There is lots of uncertainty.
“So when you talk about what the future holds from the economy with this administration, you actually have to first make an assumption of what actually comes into being law. And that’s a big assumption. It is an assumption, in fact, that the Fed does not make. We don’t make those kind of assumptions. In fact, it’s inappropriate for the Fed to make judgments about what fiscal policy will be doing. When we have actions that have been taken that will have an impact on the economy, we analyze that and put it into our model with regard to how its impact on the economy will be. But until that stuff happens, we just don’t make assumptions or changes to the policy.”
Strauss said the Fed isn’t the only one reacting in this manner: At the 30th annual Economic Outlook Symposium in December, the view was that the economy is going to grow this year, and it’s going to grow a bit better than last year, but it’s “not going to be anything of a substantial note.”
“We heard from people in the steel industry, heavy machinery, banking sectors,” he said. “All the presentations talked about the fact that they’re not ready to change their outlook at this point. However, they all indicated there’s absolute upside risk to economic growth. So I think that’s the way we need to be thinking about some of the numbers. These numbers have a better chance of being a bit stronger. How much stronger, we will have to wait and see.”
Strauss said GDP has expanded by 1.7% over the past year—now the third-longest expansion in history—but all in all, “it has not been a very impressive recovery. It’s been kind of just trend-like. In fact, in December, the 17 members of the Federal Open Market Committee (FOMC) put together their outlook, and they expect GDP to grow just above trend over the next three years after what is expected to be between 1.8% and 1.9% for 2016: 1.9% to 2.3% this year, 1.8% to 2.2% in 2018, and 1.8% to 2.0% in 2019.”
“If this materializes and we end up going all the way through 2019 without a recession, we will have the longest expansion in our economic history,” he said.
He said employment increased by 2.16 million jobs in 2016 and the unemployment rate has fallen to 4.7%, but wages and benefit costs continue to increase at a slow pace.
The FOMC forecasts that the unemployment rate will be just below the neutral rate through 2019: 4.5% to 4.6% this year, 4.3% to 4.7% in 2018, and 4.3% to 4.8% in 2019.
The FOMC anticipates that Personal Consumption Expenditure (PCE) inflation will be around its 2% target over the next three years: 1.7% to 2.0% this year, 1.9% to 2.0% in 2018, and 2.0% to 2.1% to 2019.
The FOMC anticipates that “core” PCE inflation (minus food and energy) will increase every year and reach 2% by 2018.
Strauss said slow productivity growth helps explain why relatively strong employment growth has not translated into higher income.
“A large part of the weakness in productivity growth has been the weak pace of investment,” he said.
He said manufacturing output is flat compared with a year earlier, noting it declined in one of four quarters in 2016.
Capacity utilization has been edging lower, the supply managers’ composite index has been strengthening, and industrial production is forecast to improve next year, but expand at a pace below its historical rate. The Blue Chip IP forecast is for 2.5% growth this year and 2.3% in 2018.
Strauss said monetary policy has been very aggressive, keeping the Fed Funds Rate very low since December 2008. The Federal Funds Rate is expected to reach neutral (3%) at the end of 2019.
• The outlook is for the US economy to expand at a pace around trend through 2019.
• Employment is expected to rise moderately with the unemployment rate remaining very low.
• Disappearing slack in the economy will lead to a gradually rising inflation rate. ♦
Heavy Duty Aftermarket Week 2018 will be held January 22-25 at The Mirage in Las Vegas.
Find the Heavy Duty Aftermarket Week Report archive with articles from 2012 to present