AKE’S TAKE: Scoring Some Economic Touchdowns

By | February 14, 2017

The previews of the Super Bowl indicated it would be a very close game, between two evenly matched teams. These predictions turned out to be accurate as we witnessed the first overtime game in Super Bowl history. Based on the matchup, I also expected the score to be very close the entire game, with no team being able to dominate the game for very long.

Of course, that assumption was wrong, very wrong. The Falcons had the momentum in the first half and built a big lead, however the Patriots had the overwhelming momentum in the second half. “Momentum” is an intriguing concept in sports; it can’t be seen, but the results are obvious.

For the first time in years, it appears this economy has some positive momentum. At the beginning of this long, slow recovery, the manufacturing sector produced the growth, while the consumer side was sluggish. Fortunately, just as manufacturing slowed, consumer activity increased. Now, the consumer sector is maintaining its progress, and manufacturing appears ready to regenerate after an extended rough patch.

I had warned in 2016 that the economy was entering a danger zone because Class 8 truck sales were dropping after a high peak, an indication of a future significant economic downturn. I said, if the economy made it past November without a recession, there was potential for stronger economic growth. The economy struggled in Q3, but made it through the danger zone basically unscathed. Now the Class 8 truck market is stabilizing, a very good sign for the economy in 2017.

A review of the key sectors:

Consumer: Retail sales were up 0.6% in December. The economy continues to create jobs at a steady pace. Personal income is rising. The consumer services sector also continues to do well. The National Retail Federation forecasts that sales could increase up to 4.2% this year.

Manufacturing: The ISM (Purchasing Manager Index): January’s reading is 56%, the highest since November 2014.

Housing: While nobody was paying attention due to the election and other news, the housing market had a solid 2016. Housing starts increased 4.9% over 2015, and that trend is expected to continue entering this year.

Energy: The new OPEC agreement has increased and stabilized the price of crude and led to significant increases in domestic drilling and exploration. Of course, it is not back at previous levels and is dependent on crude prices remaining somewhat stable.

Economic Indicator Indexes: Both the Conference Board – Index of Leading Economic Indicators and the Economic Cycle Research Institute – Weekly Growth Index are indicating increased economic growth in the next six months.

Commercial Vehicles and Freight: Class 8 truck orders have improved since October, and production is positioned for a moderate increase over the late-2016 slump. Commercial trailers have also stabilized after some expected market weakness the second half of 2016.

My Leading Economic Indicators: I track 17 forward-looking indicators. Back in August, 3 were positive, 5 were neutral, and 9 were negative. This translated into a 1.9% Q4 GDP. Currently, 10 are positive, 4 are neutral, and 3 are negative.  The trend is moving in a positive direction.

What About a Trump Bump?

I do believe the election has had an impact, but not in the way most people think. I contend that businesses (especially small businesses), and some consumers, held back spending in the three months prior to the election due the fearful uncertainty created by a caustic campaign. Once the election was over, this caution faded, spending resumed (with maybe some pent-up demand), and the economy got a boost.

While consumer and business confidence have risen significantly since the election, it will take time for this confidence to translate into actual dollars. However, this confidence can make a difference if it provides even a nudge to an already accelerating economy. It is important to note that all the indicators mentioned above were measurements taken before the transfer of power.

The Forecast

The Wall Street Journal Economist Panel average is for 2.2% GDP growth in Q1 and 2.4% in Q2. FTR (Freight Transportation Research) is at 2.7% and 2.3%.

The Call

This economy does have momentum. Will this produce some “economic touchdowns” in 2017? I like our chances based on the solid improvement of the forward-looking economic indicators, I think it’s possible to increase 100 basis points from the 1.9% of 2016Q4. Take the “over” on the predictions, and look for around 3% growth the first half of the year.

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About Don Ake

Don has more than 20 years of experience in the transportation industry, including 16 years with industry supplier Hendrickson International. Don has a very strong forecasting and market analysis background. While at Hendrickson Don developed forecasting models, methods and processes to accurately forecast Truck and Trailer builds and product demand. Don wrote an industry economic newsletter and gained a reputation as a top industry analyst. His industry supplier background provides a "customer perspective" now that he is with FTR.