The Great Recession officially ended in June 2009. "But a recession ending doesn't mean the economy is operating anywhere near a normal type of level," said Bill Strauss, chief economist with the Chicago Federal Reserve. "In a technical sense, the words we would use is the economy still stinks."
Actually, when measured by Gross Domestic Product, the economy has been growing at a pretty good clip -- 3.2 percent growth over the last four quarters which is above the trend growth of 2.5 to 2.75 percent. But "it doesn't FEEL like we're doing all that well," Strauss said. The main reason for that, he said, is that rebuilding of inventories accounted for 62 percent of that growth. "This is truly a story of the tail wagging the dog," he said, because inventories represent a fraction of 1 percent of GDP.
Inventories, he explained, are goods that are produced but not sold in the marketplace. If we remove the inventory number from GDP, that's called final sales. Final sales also normally trends to 2.5 to 2.75 percent, but it's only been growing at just over 1 percent. "Here you can see why it hasn't felt so good," he said. But he predicted that number will more closely match GDP growth in 2011 and 2012.
In 2011 and 2012, growth will accelerate somewhat, Strauss said. "But more importantly, it's going to feel better, for two key reasons." Number one, he said, the inventory bullwhip effect is probably coming to an end. Number two, he said, government stimulus is unlikely under the new Congress.
"But even with the pullback in inventory and government spend, we're going to be looking at growth that is going higher," Strauss said. "And that's why it will feel better."
The Fed's forecast is for GDP growth of 3.5 to 4 percent this year and close to 4 percent for the next couple of years. That is more optimistic than the Blue Chip Economic Indicators, a monthly survey of 50 forecasters. That consensus puts GDP growth at 3.3 percent through 2011 and about the same for 2012.
That's less than we've seen coming out of previous deep recessions, pointed out Eric Starks, president of FTR Associates, where 5 to 10 percent was more the norm. "We cannot completely discount history and say it won't be there," he said. "If that happens things get a little crazy."
Unemployment is expected to keep edging down, with the Blue Chip forecast projected for 9.1 percent by the fourth quarter of 2011 and 8.4 percent by the end of 2012.
The Manufacturing-Led Recovery
The one sector of the economy that has been the true growth sector is manufacturing, Strauss said. Manufacturing has been expanding for 18 months - and it has not been slightly above trend, it has been well above trend, growing at a 7.8 percent annual rate. The sector has recovered 56.6 percent of what it lost during the recession, and by second quarter of 2012 should have recovered all of that and will again be looking at record numbers.
Looking at industrial output numbers from December 2007 to June 2009, Strauss noted that the two that fell the most were motor vehicle/parts and primary metals, which kind of go hand in hand. "But much like a tennis ball, the industries that fell the worst are the two sectors that are leading the way" in the recovery. "You're seeing spectacular increases."
The relatively better performance of manufacturing is expected to persist over the next couple of years, Strauss said, although perhaps not quite so drastically. The Blue Chip forecast puts industrial production rising 4.1 percent through 011 and 3.8 percent in 2012. Strauss said he's optimistic it will be even higher.
And, of course, manufacturing is an important figure for trucks, as the services portion of the economy can't exactly be transported on a truck.
Manufacturing was also cited as a strong economic figure by Donald Broughton, partner with Avondale Partners, citing the Institute for Supply Managements's Manufacturing Business Survey, ISM's Purchasing Managers Index was at 57 percent for December. (A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding.)
"I generally don't like confidence indexes because they tend to be squishy," Broughton said. "It's all about feelings. Except purchasing managers. When I ask them how they feel and they say they feel good, it means they're signing POs. So there's a strong correlation with truck tonnage." However, he notes, it's only good for short-term predictions. After a month or two the accuracy drops off.
The capacity question
Much has been made of the issue of capacity coming out of the industry thanks to trucking bankruptcies, truck exports and other factors.
Broughton pointed out that during the previous recession, 11 percent of gross capacity was taken off the road by bankruptcies. But the remaining players added trucks, bringing the next capacity reduction to only 7 percent. By contrast, in this cycle, trucking failures took 12 percent of gross capacity off the road - and the remaining players cut the size of their fleets, bringing the net capacity reduction to 15 percent.
Equipment is not the only factor in capacity, however. Those truck must have drivers in order to haul freight. As Starks said, "the looming driver shortage keeps getting delayed, but it is only a matter of when." The Federal Motor Carrier Safety Administration's new CSA enforcement program and proposed changes to hours of service will have a negative impact on the number of available drivers.
"The most important thing is fleets are not looking to add capacity," Starks said. "They are using current units and searching for more 'desirable' freight." While truck orders are picking up, he said, they are to replace aging equipment, not to enlarge the fleet.
FTR measures "active capacity" - the number of trucks out there actually looking for a load, not the trucks parked against a fleet's fence or on a used truck lot. "We're sitting at about 95 percent utilization of active capacity right now," Starks said. "And as we get into the middle of the year, the system is going to hit 100 percent capacity."
Fleets will be less likely that in the past to just go out and add equipment to expand the fleet, Starks said. Those turcks are just more that can be penalized by CSA. And if you don't have a driver for that truck, you're not going to buy a new truck.
However, Broughton said he doesn't believe that pricing will improve as much as some analysts have predicted as a result of this tightening capacity. Yes, rates will go up, he said, but he thinks predictions of 15 percent or more by the second quarter of 2011 are unrealistic.
And margins will be flat despite higher rates, Broughton said, because utilization is going down thanks to the government's new CSA program and proposed changes in hours of service, but costs are going up for fuel, labor, equipment and more.
Starks responded in a later presentation to Broughton's comment, saying FTR expcts to see a 10 to 15 percent increase in rates. "Does that mean that's all profit? No! We're going to see costs go up 10 percent or more, so their profit margins are going to continue to get squeezed."
Starks also pointed out that freight is the most important indicator to be watching in order to understand the recovery. "What we've seen is that freight had flattened out over the last six to nine months, but we see things are going to start picking back up." In fact, Starks predicts a 3.5 to 5 percent growth in freight over the next several years, which is significantly higher than the usual rate of around 2 percent. However, it will still take a lot of growth after such a