Ake’s Take: The Economy Just Went Viral

By | March 10, 2020

 

As 2019 progressed, economic growth slowed and there were more downside pressures than upside. In Q4, the commercial vehicle market abruptly turned south due to the great amount of uncertainty regarding the economy. Businesses abhor uncertainty because it makes planning difficult and greatly increases the risks of new investment. As a result, trucking fleets became cautious about buying new trucks and trailers.

However, the new year saw much of that uncertainty removed from the environment. On January 15, the Phase One trade deal was signed with China. While most of the tariffs remained in place, it served basically as a cease fire to the trade war. Businesses had already responded to the trade conflict and the deal gave them renewed confidence. The next day, the U.S. Senate approved the USMCA. Yes, it may take many months to see the benefits of the new deal, but uncertainty over the trade situation in North America pretty much vanished with that vote.

I believed those two actions removed enough uncertainty that there was opportunity for the economy to get a boost and start growing in 2020 at higher than the 1.7-2.0% rate that most economists were forecasting. We had a chance. Yes, after many months of turmoil, we finally had a chance.

But sadly, into the middle of this risk vacuum plops the COVID-19 virus. I had been saying for over a month that the equipment markets were on a straight-line course through Q3 unless some outside shock to the economy knocked them off track. The coronavirus is more like an earthquake which has the potential to cause a train wreck.

For a forecaster, the COVID-19 is the wildest of wild cards, the darkest of the black swans. It’s totally unpredictable and it affects almost all facets of human economic behavior. And yet, forecasters exist to forecast. Thus I have been asked twice, first on a webinar, and then on the radio, to predict the virus’ impact on the freight and trucking markets.

My answer in early February was that it appeared the virus was contained and only caused some minor disruptions in the supply chain, but qualified with, “If things get worse”… Of course, three weeks later the situation was worse, so the answer changed to “The supply change is being impacted and freight will be impacted some. The impact will be greater, the longer the situation lasts.”

Interestingly, both times these answers were insufficient. The follow up question was identical. “But don’t you think if the virus spreads in the U.S. that freight is going to be greatly impacted?”.  

My reply is: “If the situation gets so bad that we have freight disruptions in the U.S., then we have a much more serious problem than just late shipments.”

And that is the crux of the issue. The greater the virus impact, the bigger the impact on the trucking industry. There are already supply-chain disruptions taking place.  A small Ohio manufacturer has reported that he cannot get much needed materials from his Chinese suppliers. The scarcest commodity? Paint masks.

Naturally, there is disagreement among economists over the impact of the virus on the economy. I recently attended a local economic forum and listened to the economists on the panel. The three economists agreed that COVID-19 would have less of an impact than the SARS pandemic of 2003. They said the economy would take a hit in Q2 but make most of the loss up in Q3 and Q4. However, a prominent economist said this week that the virus will be devastating to the U.S. economy this year.

Class 8 preliminary truck orders showed about a 20-25% negative impact of the virus on our industry in February. This is a significant economic indicator because truck manufacturing is representative of the manufacturing sector and trucking freight is connected to a great portion of the general economy.  The numbers indicate the economy will take a big hit in Q2 and may not bounce back in Q3. So, I would venture the economy will end up a bit worse than the forecasting panel thinks, but hopefully not a disaster.

At the beginning of this threat, many economists predicted a “V” recovery, with a sharp plunge and an immediate snapback. But this is not realistic because this is a global market. Supply chains have been disrupted and it will take more time to recover than it has in the past. And based on history and some of the details, it probably is an irrational overreaction by many people. The problem is you don’t know that you are overreacting until you find out that you are actually underreacting, and by that time it’s too late and the situation is out of control. My prediction is that normal activity will resume in July.

And don’t look for a “V” recovery in the stock market either. It’s more like a WWWWW trend right now. But the market was due to for a correction, and the virus is taking more than a little air out of the balloon.

Add all this uncertainty together and forecasting, whether it be the economy, or trucking industry, becomes almost impossible to forecast. Even after things stabilize the economic indicators will be skewed, similar to what happened after the Great Recession. There is no “virus” factor to plug into the standard economic models. It is indeed a wild card. Yes, the wildest card of all. For reasons that transcend our industry, let’s hope and pray things do not get too wild.

 

 

 

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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.

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