The big economic news in recent months has been the upturn in the national economy. Increases in various indices of economic welfare, such as gross domestic product, consumer spending, industrial production and employment have stimulated talk that the recovery is finally underway – nearly three years after its official beginning in June, 2009.
Buried beneath all the happy chatter lie a host of problems and potential problems. The housing sector – both in terms of new construction and sales of existing homes – is still “flat on its face,” in the words of a leading economic forecaster. Bank portfolios – stuffed with mortgage-backed securities – are steaming piles of fiscal matter. The Federal Reserve is still riding the tiger of its “zero interest rate policy,” dictated by the looming specter of a federal budget completely devoured by interest payments after a rise in rates.
It seems almost trivial to worry about something as pedestrian as the trucking industry. Yet it behooves us to remember that the Great Recession was preceded by a “freight recession.” By the time recession was officially declared in December, 2007 – actually, it was months later before the National Bureau of Economic Research made the announcement – truckers had already been feeling the pinch for well over a year.
Now trucking is in the doldrums again. The two newest and most promising indices of trucking activity are sending signals that diverge dramatically from the messages delivered by the Department of Commerce about income, production, spending and employment. What are we to make of this?
The DRI Disconnects from the Broader Economy
Access Advertising’s Driver Recruiting Index (DRI) compiles the number of driver-recruiting ads placed each week in a geographically diverse group of Sunday major-metropolitan newspapers. The underlying rationale is to approximate the economic, or ex ante,demand for drivers. Data collection began on January 2, 2009 – just over three years ago.
For most of its short life, the DRI’s variations have closely tracked movements in the broader economy – e. g., changes in national income, product, spending and employment. Usually the DRI has followed those movements rather than leading them. We may conjecture that the Great Recession has left companies chary of taking on the fixed costs of employees, and willing to do so only on the assurance that demand for their products is robust rather than ephemeral. Thus, recruiters hire in arrears of increases in production rather than ahead of them.
Beginning in September, 2011 – a season that is normally good for an uptick in freight carriage and driver hiring – the DRI suddenly went flat as a diving board for two months. The year-end holidays comprise a huge chunk of annual retail sales, and retailers typically prepare by beefing up inventories in the fall. This recent lacuna was all the more surprising because inventories had previously fallen to dangerously low levels. Yet the stony indifference displayed by the DRI suggested that trucking firms were meeting any increases in freight supply by squeezing more productivity from the existing driver force rather than by increasing their demand for drivers.
Throughout the holiday season, the DRI recorded yearly lows. All other things equal, this was to be expected; the year-end holidays are the seasonal doldrums for the trucking business. What was unexpected, however, was that the DRI showed no response to the steady stream of good economic news that continued into the New Year.
As the New Year progresses, the trucking engine turns over and roars to life. Construction projects begin. Harvested crops zoom to market. Sure enough, the DRI began to record increases. But these were puny in magnitude for an economy in the recovery phase of the business cycle. During a recovery, economic values should be seasonally high; they should exceed their previous-year values. In February and March, 2012, DRI index numbers fell short of previous-year values on comparable dates by nearly 20%. Even the 8-week moving-average year-over-year comparisons – explicitly constructed to smooth random weekly fluctuations – racked up record declines for the DRI’s 3-year history.
The clinching datum in this analysis is a dog that didn’t bark – or rather, howl. The previous winter was the mildest in decades, one of the warmest on record. This should have set the table for a banner spring trucking season.
The Department of Commerce said that the economy was beginning to hum. But according to the DRI, the nation’s driver recruiters didn’t know the words. And the trucking industry could hardly play a symphony without a full complement of musicians.
Supporting Evidence: the Ceridian PCI
One immediate reaction to the divergence between the DRI and indices of the overall economy might be to question the DRI’s veracity. Perhaps it is no longer doing its job of accurately sampling ex ante driver demand. One possible explanation for this might be a large-scale substitution of Internet job sites for newspaper classified ads as a means of recruiting drivers. Alternatively, recruiters might have turned to secondary advertising sources like smaller dailies, community papers, shoppers and alternatives in lieu of more expensive major-metro newspapers.
As it happens, independent corroborative evidence supports the DRI’s verdict of contrarian behavior by the trucking sector. The Ceridian PCI provides real-time data on diesel-fuel purchases by truckers at some 7,000 truck stops nationwide. It was devised and is monitored by longtime econometrician and forecaster Edward Leamer. Leamer’s recent comments sketch an outline of recent events that is both revealing and disturbing.
Leamer believes that when final GDP revisions are complete, they will likely indicate 4th-quarter growth that was closer to 2% than the 3% that was originally touted. On the basis of PCI data, he speculates that the difference is accounted for mostly by the failure of inventory growth to come up to expectations. Since trucking accounts for approximately two-thirds of all U.S. freight shipments, Leamer views PCI data as a still photograph of “inventories in motion.”
Movements in the Ceridian PCI Index since September are consistent with the pattern followed by the DRI; namely, one of decline once seasonal factors are taken into account. After small increases in September-November, the PCI decreased in December-February. February’s 0.7% increase cancelled out an equivalent decrease in December 2011, leaving a sharp 1.7% fall in January.
These two indices come at trucking from different directions but share a real-time perspective. Their convergence is highly suggestive. It makes a prima-facie case for taking their data seriously. Then the question becomes: How should we interpret that data? What explains the fact that trucking and the overall economy are seemingly “out of sync,” to borrow Edward Leamer’s description?
Some Possible Explanations
One explanatory element was pinpointed by Leamer himself. The forecaster complained that the U.S. housing market was still “flat on its back,” noting the conventional estimate of 17 truckloads of materials required to erect a house. When houses aren’t being built, those trucks aren’t rolling.
Another plausible factor in the relative decline of trucking is the increase in the relative price of diesel fuel. The average price per gallon was $3.81 last year at this time and is now $4.25. Basic microeconomics tells us that when a key input price rises, the “output effect” will cause the firm’s (and the industry’s) output to fall.
Another process at work involves competition from other forms of transportation. That process has under way for years with containerization, the combination of ship, rail and trucking transport of freight held inside metal containers. To the extent that this displaces functions previously performed solely by trucks, this might cause reduce trucking activity.
Each of these explanations seems plausible, but none of them seems strong enough to have put an industrial sector the size of trucking to sleep. For example, Leamer pointed out that imports of containers on the U.S. West Coast are down in recent months, so containerization is not a likely suspect in the current somnolence of the trucking industry.
What’s Up With the World Economy?
Americans are accustomed to what might be called a Ptolemaic view of international economics, with the U.S. as the sun around which the economies of other nations revolve. This is no longer accurate. Economies such as China, India and the European bloc now exert considerable quantitative force on world markets. This applies especially in energy markets, where the combination of huge populations and relatively inefficient energy use cause China and India to use vast amounts of oil and gas.
Economic growth is slowing to a crawl throughout the world, owing to high energy prices and the financial pressures exerted by the crushing debt burdens carried by Western nations. This makes the current American revival suspect and, in any case, likely short-lived. Rather than faulting trucking-industry indices for their incongruence with GDP and employment data, we should be inspecting the overall data with a jaundiced eye and a view toward uncovering its underlying weaknesses.
Here We Go Again
Conventional economic analysis of the financial crisis and the Great Recession mimics that of the stock-market collapse and Great Depression that began in 1929. The financial events are attributed to insufficient or maladroit regulation, while the real economic contractions are ascribed to insufficient aggregate spending by households, firms and government (!). Despite the repeated explanatory failure of both these paradigms, they remain dominant. No matter how bad a dominant theory is, Thomas Kuhn famously declared nearly fifty years ago, it will remain in place until supplanted by a more satisfactory alternative explanation.
The Austrian theory of the business cycle has been outlined previously in this space. It provides a skeletal explanation for why economic busts always follow booms that are artificially engineered by government creation. Austrian theory also explains why the ineluctable fact of radical human ignorance precludes government regulation and central planning as a substitute for free markets. These Austrian principles suggest that the trucking sector’s troubles are a canary in the coal mine, warning us of the poison fumes to come.
Despite abundant evidence that Federal Reserve money creation and artificially low interest rates midwived the housing bubble that lay at the heart of both crises, the Fed persists in its “zero interest rate policy” (ZIRP) to this day. Although Chairman Bernanke gives lip service to a rationale of economic stimulus, it is clear that government budgetary considerations are the real motivation for this. Alas, its effect is analogous to that of alcohol on the senses of a drunk suffering from hangover. We are now experiencing a brief, temporary period of euphoria as the money created by ZIRP belatedly wends its way through our economy. When the effects of that created money take hold, however, it will be déjà vu all over again.
The crisis period of an Austrian business cycle occurs when investments that were feasible and desirable only because created money and low interest rates made them appear so are revealed to be unsustainable. That crisis is often triggered by a rise in interest rates, but in this case Federal Reserve policy precludes that. Still, the Fed cannot dictate economic reality merely through the use of monetary policy and interest-rate pegging. Like a suitcase that is overstuffed, pushing the contents down one place merely drives them up somewhere else.
It seems likely that the crisis-trigger is commodity- and input-price inflation. In the classical Austrian business cycle, the competition for goods drives up prices, which ultimately drives up interest rates. Higher interest rates and loss of investment funds are what kill off the unsustainable investments, and this in turn produces layoffs and unemployment. In our current variant, excessive regulation and increases in commodity and input prices play the triggering role. Both the Fed and regulators continue to force-feed investment in residential housing. This time, however, the subsequent refinancing, second mortgages and other creative tools that extended the original housing boom are nixed by new financial regulations governing housing finance. The rising input costs and lack of demand are sufficient to prevent artificial resuscitation of the housing sector.
Meanwhile, the spillover effects to related industries have begun again, just as they did starting in 2006 and 2007 – only via somewhat different routes. Housing hardly had a chance to re-emerge as a factor in transportation markets; consequently, the current slump in trucking has been triggered by rising costs of diesel fuel and punitive regulation by the Obama administration.
If “inflation” is triggering a return to recession, why are its effects so selective? Contrary to popular belief, inflation is seldom if ever neutral in its impact on relative prices; some prices always go up more than others and some always rise faster than others. Since every price is income to somebody, the beneficiaries of inflation realize higher incomes, which they spend, thus driving up the general level of prices. Only gradually, as the contagion of bad investments, layoffs and unemployment spreads from sector to sector, do the effects become general. We are still in the early stages, when the spending generated by beneficiaries creates employment in some sectors while the unlucky sectors – like trucking – are among the first to feel the ill effects of higher prices and costs.
How Deep Is the Ocean?
Since the depth of the recession and consequent stringency of regulation limited the height of this latest “boom,” the double-dip into recession will not be as deep as the Great Recession. At least, not unless the extreme vulnerability of banks in Europe and the U.S. produces a wave of failures and our system-wide financial insolvency is exposed to the world. In that case, all bets are off.
Although the next recession may not be deep, the determination of the monetary authorities to preserve ZIRP will keep it long. Political factors – the necessity for government always to appear busy, even when its actions are in fact counterproductive, plus the necessity to restrain interest payments on debt from devouring the federal budget – make it impossible for politicians to follow a prudent economic policy.
Can it really be that all this follows from the divergence of trucking from the path followed by most other real economic sectors? As the saying goes, great oaks – and oafs – from little acorns grow.