Economy Shuffles Along
September 25, 2012
Speaking at TMW System's Transforum 2012 User Conference this week, Costello affirmed there were still a lot of concerns on the economy, but noted that the good news was that where we are today, we only have about a 25% chance of a recession.
While that may sound ominous, he reminded his audience that at any time, there is a 10% chance of recession.
He predicts GDP growth will average a meager 1.5% through the rest of 2012 and into 2013. "We won't get to 2% growth until the 3rd quarter of next year," he said.
Many of the problems in the U.S. - specifically the "fiscal cliff" - are policy related, he said, but there are real problems in Europe that could have adverse effects on the economy.Key indicators
Costello noted that while manufacturing is outperforming GDP, manufacturing output has been volatile, although the trend line for the last six months has been pretty flat. New factory orders indicate what is going to happen in manufacturing, and there are no large backlog sof orders on the board.
"On a year-to-date basis, factory orders are not growing," he said. "Orders in July and August this year was exactly what it was last July and August. We are not going to see the types of growth out of the manufacturing sector that we've seen over the last couple of years."
One area that is improving: housing. An improved housing market would help trucking.
"Housing is turning the corner - it is one area that is really improving." He said he would not be surprised if in three years there is a housing shortage in this country because "we've been underbuilding since the recession. We've been below the replacement threshold for some time."
He said family formation is one of the biggest drivers in housing. Because of the weak job market, many recent college graduates and other young people continue to live with their parents. Once the job market improves and pay goes up, more families will start forming as these young people move into their own homes. Inventories
Costello said that inventories are a concern, or at least the ratio of inventory to sales.
"Since 1990, there has been a dramatic decline in the inventory to sales ratio because the supply chain has become much more efficient," he explained, "but over last few months, inventories have moved slightly up as retail sales have fallen."
Low inventories usually mean more freight, so this indicator is going in the wrong direction. He said most retailers don't believe this holiday season will be as good as last holiday season. It will be up, but not grow as fast as last year.
Costello described the job market as schizophrenic. "My advice to you -- ignore the unemployment rate going forward." Because unemployment figures do not include those who have given up on looking for a job, he recommended paying more attention to monthly job growth.
"We need to be creating 200,000 jobs each month to get the unemployment rate down," he said. "I'll take 150,000 at this point, but if we are below 100,000 for a period of time, that is not good."
Costello thinks problems in the Eurozone will have an impact on the Euro. Greece and other countries are in such dire straits, they may have to start printing their own money again. The effect will be to drop the Euro's value against the dollar. While those countries will be in trouble in the short term, he thinks it "will probably be good for them long term."Kicking the can
Costello said he is somewhat pessimistic regarding the "fiscal cliff," the nickname for what will happen if Congress and the administration do not agree on a long-term spending and debt-reduction plan. The trigger cuts scheduled to kick in if no budget deal is reached will mean a "half-trillion dollar hit on the economy."
His pessimism is because "the problem is a policy problem, and businesses have reduced hiring and investment because of the uncertainty."
Costello said he thinks the current Congress will kick the can down the road, which will further hurt the economy.
"Corporations have a record amount of cash on hand, but they are not going to invest it until Congress and the administration can get their act together. Good risk-taking is on the sideline."
He said what is most likely to happen is that we won't fall off the 'fiscal cliff,' but after the election, when there will be a lame duck Congress and perhaps a new administration, they will "punt until next summer."