The Transport Navigator The Early Twenties: the Last Cycle

One Last Comfortable Stretch

Noël Perry | TRANSPORT FUTURES

For some sectors, the frenzied, painful rush to the new digitally dominated world began a while ago. For smartphones, it began in the 2000’s; for retailers it began in the 2010’s. Trucking so far has been spared such pressures, even as we approach a few years where the business cycle will subject us to a set of painful, but familiar pressures. I call this turn of the business cycle the “last cycle,” because for North American heavy transport, it will be the last cycle to take place in an otherwise stable business climate. That’s a good thing because we can predict with useful accuracy what is likely to happen based on the lessons we have learned since at least 1980. That’s how long trucking has been in the same mode of operation. Nothing within the industry is likely to change enough to make it react to a slowing of activity in a new way.

When the following down-cycle appears, perhaps around 2029 or 2030, we will have to deal with it at the same time we are dealing with radical changes in almost every aspect of the transport business. I am referring, of course, to the digital revolution and its effect on manufacturing, information flows, supply design and the automation of trucking. But most of those issues are something we won’t have to be adapting to for a few more years. As a result, looking back at the early 2020’s for a position amid all that change after 2025, this down cycle will appear an easy one. Why can’t we just go back to the good old days?

What Will “Good Old” Look Like?

Let’s start with how the economy looks right now. The optimists point to strong consumer spending, decent income growth and low unemployment. The pessimists point to significant troubles in the global economy and a marked slowdown in capital spending and manufacturing. An economist knowledgeable in historical statistics calls such conditions “consistent with the approach to recession.” That’s because we usually get a combination of vigorous consumer activity, and weak capital investment and manufacturing late in recoveries. Consumer activity is healthy because employment peaks late in recoveries. Employers, having enjoyed a string of good years, feel secure about hiring. In contrast, after eight to 10 years of buying a lot of big-ticket items, companies are saying “enough is enough.” My region around Harrisburg, Pennsylvania at the junctions of I-76, I-83, I-81, and I-78 has seen an explosion of distribution center construction since 2009. How many more do we need?

Trucking Slows Before the General Economy

Because freight volumes are driven more by manufacturing and investment than by consumer spending, trucking usually slows noticeably in the year before a recession. That makes it a useful leading indicator because its conditions are a visible result of the weakness in the manufacturing and investment sectors. The accompanying chart shows that leading tendency. While GDP remains around 2%, truck freight is down around zero. I have studied the approach to recession as far back as 1965. Such a slowdown usually occurs during the year before recession. Not always, but almost always. So, why should you worry about recession when consumers are happy? History tells us that consumers become unhappy three to four quarters after trucking begins its dive.

It’s Going to Get Worse

It gets worse for two reasons: First, when the consumer sector gets worried, as in a recession, it consumes less freight worsening the decline shown above. Second, when GDP approaches zero, manufacturers and capital investors really get conservative, lowering their freight spend even more. In an “average recession” freight falls about 10% from its previous peak and rates drop between 5% and 10%. The spot market almost doubles those falls. Also in a bad recession, like 2008-2009, the drops double.

When Will the Shoe Drop, and How Far Will It Go?

There are two pieces of good news as this recovery approaches its end. First, and most importantly, there is no bursting of a bubble, no big economic shock on the horizon. In 2008 we had the bursting of that great housing bubble and its disastrous effects on the banking sectors. There is nothing like that in the U.S. for 2020. Second, the modest nature of this recovery has limited the overbuys of big-ticket items, especially single-family housing. Small overbuys mean small underbuys. Perhaps this baby will have a “soft-landing” like the recession of 2001 which many economists said was not a recession.

However! While consumers sailed right through that event, freight haulers did not. It was an average freight recession as those things go. These two factors cause me to plug in a modest recession. As to when – history tells us that, barring a shock of some type which would bring about instant calamity, an economy chugging along slowly like this one will not slip into recession for another two quarters or so. I think 2020.3 or sometime next summer. That timing means that contract truckers will still post decent results for full-year 2020 given the decent first half.

In an “average recession” freight falls about 10% from its previous peak and rates drop between 5% and 10%. The spot market almost doubles those falls.

However! While consumers sailed right through that event, freight haulers did not. It was an average freight recession as those things go. These two factors cause me to plug in a modest recession. As to when – history tells us that, barring a shock of some type which would bring about instant calamity, an economy chugging along slowly like this one will not slip into recession for another two quarters or so. I think 2020.3 or sometime next summer. That timing means that contract truckers will still post decent results for full-year 2020 given the decent first half.

Does the Last Cycle Have an Upturn?

All down-cycles do. Politicians and Federal Reserve bankers think that is because of the anti-recession stimuli they create in response to the pain. This time, there is some doubt about those stimuli because those two groups have been stimulating the recovery almost continuously since 2008. How much lower can the Fed reduce interest rates when they are already at historical lows? How much fiscal stimulus is possible for a federal budget with a trillion-dollar deficit? I predict both entities will press the additional stimuli lever, the Fed, through their quantitative easing tools, and Congress by creating a trillion and a half-dollar deficit. I am calling this the last cycle in part because I suspect that financial markets are running out of tolerance for bloated sovereign debts. Sometime in the next 10 years – probably before the next cycle – that will occur, bursting the big bubble and creating a new banking and governmental spending era. How much longer will the Germans keep lending the Southern Europeans money? I would have already stopped. I would not pour my retirement savings down that hole. Part of my reasoning about that is, as an Austrian economist1, I don’t believe that such stimuli work. For instance, this recovery is the weakest since World War II, while having easily the most lavish governmental stimulus. Where is the cause and effect? That said, the recovery will happen when it usually does, after 12 to 18 months, and will produce the usual increases in truck volume. If that pattern holds, we can expect the return to good times to start for truckers in the summer of 2021, with 2022 being a full-blown recovery year.

The Good Times Come Back in 2021?

Note importantly that it will take another year before prices get back to normal. You can see that in the accompanying chart of spot prices. The economy exited recession in 2009.3 after the last recession, while spot prices didn’t get back to normal until the beginning of 2011.2. Volumes didn’t surpass their 2007 peak until 2014.2. The catch-up time explains why recoveries have that title. It takes time to “recover” to normal levels. It also helps explain why strong companies will commonly make big jumps in the early quarters after recessions. Most everyone else is preoccupied with restoring their balance sheets while the winners can take advantage of the uptick in volume and prices. Those upticks are not enough to create prosperity for everyone, just the well-managed fleets that come out of recession with their houses in order.

How Sure Are You?

Forecasting is the business of managing risk. The future is, by definition, heavily unknown; otherwise, how could we distinguish it from the past? One manages that risk by being prepared to make it easy to adapt when the future is revealed. Fortunately, the mechanisms of our universe have a known, repeatable structure, from the sun coming up every day to the way our siblings respond to people. Therefore a study of those mechanisms, as an economist does, gives us a good idea of the range of things that could happen tomorrow or next year. With a bit more work we can prepare for the possible events in that possible range, especially for those things that make a big difference.

It is in light of that process that I emphasize the chance of recession next year. History tells us that every recovery comes to an end; so this one will too. To not have an end to recovery would require something unprecedented. Moreover, history also tells us that the things happening right now usually occur just before a recession. Still, this recovery could last several more years. It has already lasted longer than I thought it would. I hold that possibility at less than 40%, but I am not the foolish economist who claims that he is sure of the future. Should the recovery be extended, history tells us that freight would be sluggish, growing less than 1%, except for the random variations that could get it above that average for a quarter. One concludes, then, that relief from the current disappointing conditions in trucking will not happen until the beginning of the subsequent recovery. Ironically, the avoidance of recession would extend rather than relieve the pain.

The Future Comes in Threes

In summary, I see a future with three phases. The first lasting one to possibly 10 quarters is a time of very sluggish growth. I think it will actually last three more quarters, but the timing of recession is the hardest thing to forecast. Phase two is the recession itself, lasing two to six quarters with this event, most likely at three quarters. Trucking conditions will be pretty tough during that interval with prices and volume down as much as 10%. Finally, there is recovery, tentative at first, then blooming at some point into a happy time for truckers. That preferred state is probably two years out from the end of recession.

Putting these phases against the calendar gives us a relative placid end to 2019, allowing reasonable numbers for the full year. That tentative state should extend into 2020 before recession starts, making the second half the bad time. Again full-year numbers will include a quarter or two of OK conditions. 2021 will start bad and then improve in its second half, but not before producing the lowest full-year numbers of the down cycle. 2022 should be the first year of growth. Bottom line, you need to make sure you can hang on for almost two years of difficult conditions. That said, it looks to be an eminently manageable crisis. We have seen it before. We have a good idea of its likely shape.

The Last Cycle

I’ll close by looping back to my opening comments. Just about the time the upcycle is making your life easier, the radical changes promised by the digital revolution will start to affect your business. The next economic cycle will take place coincidentally with those changes, with a good chance of recession around 2030 when the pressure of change may be at its highest. So use these next three to five years of relative stability to get yourself ready for the real chaos. In that environment the recession of 2020-2021 will look tame indeed.                 

Noël Perry is Principal with Transport Futures, located in Lebanon, PA. He can be reached at nperry@transportfutures.net.

Photo credits: johavel/Shutterstock.com, corlaffra/Shutterstock.com , Infographics courtesy of Noël Perry