DRI-420: It’s Official: The Recovery is Receding

Coping with change is famously difficult. The first stage of the adjustment is recognition. It’s hard to adjust to something when you don’t realize – or won’t acknowledge – its reality. That is the problem most people have adjusting to the current state of the economy. They can’t or won’t acknowledge that we are undergoing an unprecedented transformation rather than merely another business cycle.

We periodically review the performance of Access Advertising’s Driver Recruiting Index (DRI) as a tool to gauge the ex ante demand for commercial drivers. We juxtapose it alongside other indices of trucking and transportation to review their performance and assess the state of the economy. Two salient points emerge from our latest review.

First, the economy in general and the transportation (and trucking) sector in particular are caught in a limbo that is neither recession nor expansion. Second, experts who have been slow to recognize this fact are now belatedly doing so.

The DRI’s Spring Plateau

In 2011, the DRI began its annual climb up the ladder in mid-January, then took off sharply in February. It plateaued in April and May, only to accelerate again in June and July. Total upward movement from January to July was dramatic.

This year, after one of the warmest winters on record, the DRI began with its usual vigor in February. But in early March, it reached a plateau from which it seldom deviated through mid-June – a most unusual seasonal performance under any circumstances and even more so now. The index never came within hailing distance of last year’s spring highs and remains mired at least 10% below the values on comparable dates last year.

It is not unusual for the DRI to increase at certain times of the year or in appropriate circumstances, or for it to decrease at other times. But plodding consistency during a season and circumstances in which rapid increase would be expected is unusual. Moreover, this mimics the DRI’s trance-like behavior early last fall, when the increases in trucking activity normally associated with preparation for the end-of-year retail rush did not materialize.

Our recognition of this uncharacteristic lassitude by the DRI and the economy in general is on record. Now, however, we are part of a chorus of mainstream commentators on transportation and the economy.

The ATA Gets on Board

A longtime trucking bellwether is the American Trucking Associations’ (ATA) Monthly Truck Tonnage Index. This seasonally adjusted index of trucking volume backed up its 1.1% decline in April with a 0.7% fall in May.

ATA’s Chief Economist Bob Costello is a reliable go-to guy for a quote on the economy in general and trucking in particular. He is reliably mainstream in his views – which are favorable to big business and big government. He is consistently cautious in his projections – which is to say, not given to dramatics or overstatement.

So when Costello calls the Truck Tonnage Index’s recent dips “reflective of the broader economy, which has slowed,” you need look no further to discern the consensus of the forecasting fraternity. Costello’s lineup of suspected culprits for the slowdown is predictable – Eurozone turmoil and U.S. electoral uncertainty. This double whammy clouds crystal balls and turns corporate planners into chickens who sit clucking atop cash instead of hatching new investments.

The TSI

The Transportation Services Index (TSI) of the Bureau of Labor Statistics is another familiar index of transportation activity. The Truck Tonnage Index is a component of this broader survey of the overall transportation picture, compiled under the auspices of the Department of Transportation.

Not surprisingly, the federal government moves slower than the world it governs. Consequently, the most recent month available for the TSI is April, during which the freight index rose at the snail’s pace of 0.2%. The DOT summarized recent movements of the index thusly: “Plateauing of the freight TSI since January appears to reflect slowing growth in the general economy.”

The Cass Index

The Cass Index is yet another transportation index of long standing. It compiles separate indices for volume and expenditures. The volume index has increased throughout 2012, but the increases have been steadily decreasing in magnitude – 2.5% in February, 2.3% in March, 1.9% in April and 1.8% in May.

Commenting on this record in the June 5, 2012 posting of Logistics Management, industry analyst Jeff Berman observed “…a dearth of people that truly have real confidence in the economy,” noting that “volumes are still not close to 2007 [e.g., pre-recession] levels.” The economy, he concludes, “remains in teeter-totter mode.”

The Ceridian PCI

The Ceridian Pulse of Commerce Index (PCI) is the brainchild of UCLA econometrician and forecaster Edward Leamer. It captures real-time data on the diesel-fuel consumption of over-the-road trucks at some 7000 locations across the U.S. from the transactions cleared through stored-value card provider Ceridian.

Like most transportation indices, the PCI has registered slowing growth in early 2012 – 0.7% in February, 0.3% in March and 0.1% in April. At first glance, May seemed to reverse this trend with 0.8% growth. But there are reasons to take even this modest piece of good news with a grain of salt.

For one thing, as pointed out by Jeff Berman in Logistics Management on June 7, the May figure still represented a year-over-year decline of 0.6%. Even more telling is the fact that the volume of diesel-fuel purchases reacts strongly to diesel-fuel prices. These, in turn, depend on oil prices and the health of diesel-dependent economies like China and India. Recent downturns in both the above indicators are good news for diesel-fuel consumption specifically, but they are something of a mixed blessing for overall U.S. economic activity.

A decline in oil prices caused by an increased supply of oil is an unambiguous benefit for us. This increases the amount of resources available for production purposes, and the reduction in oil prices translates into lower costs for countless production processes in which oil is an input. But if the decline results from a reduced demand for oil at home and abroad, it is a harbinger of recession. The lower demand will result in less oil being purchased and used in production, leading to less output of derivative goods and services. Moreover, less demand for oil abroad means lower incomes and less demand for U.S. exports, which will ultimately lower our incomes and imports as well.

We are experiencing both effects – the former due to improved recovery methods like fracking and horizontal drilling and sources like shale oil, the latter due to a myriad of influences including Eurozone woes, Chinese recession and our own slogging-through-molasses economic climate. At the moment, the bad tends to outweigh the good. In turn, this tends to mitigate the significance of upturns in the PCI.

Leamer himself is just as lukewarm about our prospects as other transportation forecasters. In Berman’s piece, he characterizes trucking as “soft generally” because “growth in the components of the economy that depend on trucking is not strong.”

Light Dawneth at Last

The current consensus has been slow in forming. In the three years since the official end to the Great Recession in June 2009, mainstream commentators like Bob Costello and Edward Leamer have continually insisted that prosperity was just around the corner. In effect, they have assumed that the United States was living through a typical business cycle, characterized by a downturn that eventually hit bottom, followed by an upturn that picked up steam until it became a full-fledged expansion. Cycles might differ in detail, with respect to trajectory of contraction or expansion and duration of recovery, but not in terms of their general character.

When the rate of GDP growth began to increase somewhat in 2010, Costello confidently asserted that growth would soon accelerate and unemployment would start to fall. After all, he reminded us, unemployment is a lagging indicator and usually is the last symptom of recession to abate once expansion sets in. Late last year, Leamer reacted to a favorable monthly PCI by reading into it the long-awaited resurgence of trucking that would lift the economy off the mud flats and into the whitewater of fast-track growth.

Few economic indicators are as volatile as housing starts, but the slightest upward blip in housing over the last three years has invariably been touted as a neon arrow pointing unerringly at the promised land of full employment. Despite all economic logic to the contrary, the presumption has been that because housing was the most severely affected sector during the Great Recession, it must of necessity lift the general economy up to recovery on its shoulders.

In view of this record, the question isn’t so much how or why we all abruptly find ourselves on the same page. Instead, we should wonder why it took so long.

Revolution and Crisis

The science of macroeconomics (an oxymoronic term that is nonetheless useful) has reached a watershed moment. In his landmark study, The Structure of Scientific Revolutions, Thomas Kuhn decried the conventional view of science. A scientific theory or paradigm is not formulated, tested experimentally and formally accepted or rejected. Instead, it is adopted on the basis of practical usefulness and retained until supplanted by a more useful theory. Replacement is not effected by testing but rather in response to a crisis – the failure of the reigning theory to perform the tasks that made it useful originally.

We are now in the midst of such a crisis.

The reigning theory of macroeconomics was developed by John Maynard Keynes over 75 years ago using a combination of old and new ideas. The principal old idea was that capitalist economies suffered recurrent insufficiencies of spending that gave rise to depressions and unemployment. The principal new idea was that government could and should remedy these shortfalls by spending money and/or inducing citizens to increase spending. Eventually, economists borrowed the term stimulus from behavioral science to characterize these policies. The government spending should be funded by either borrowing or money creation. Induced private spending should be funded by either tax reductions or money creation. Increases in private investment should be induced by artificially lowering interest rates via money creation. Increases in employment should be induced by exploiting “money illusion” of workers – that is, by lowering the purchasing power of wages by money creation, fooling workers into thinking their real incomes had risen while persuading illusion-free businesses to hire more workers at lower real wages.

For over forty years, this theory was subjected to rigorous theoretical and empirical scrutiny and extensive practical application. By roughly 1980, the results were in. The theoretical scrutiny was unfavorable to the theory: no tendency toward underconsumption and unemployment was inherent in the system, government action would be unavailing, unnecessary or even counterproductive; and “money illusion” did not exist. Empirical studies were either unfavorable or equivocal. Practical application of the theory was widespread and remarkably consistent; it failed whenever and wherever tried.

In retrospect, this should not have been surprising. By 1980, the American economy had endured over 30 recessions. It had recovered from all of them without the application of the theory.

Still, the theory was not abandoned.

Macroeconomists claimed that the theory was still useful because government policy would work faster than allowing markets to recover from recession and depression unaided. Why suffer for two or three or four years when we can cure the problem in a few months or a year with the aid of government stimulus?

A Kuhnian explanation would instead find other ways in which a demonstrably wrong theory might nevertheless be useful. Government gradually took on the role of problem solver of first resort, not just in economic policy but in every nook and cranny of society. It actually solved few, if any, problems, but it was required to look as if it were trying to solve them. Trying hard.

Democrats, who had been the first party to advocate tax reductions as economic stimulus, eventually had to repudiate this policy because it supposedly enriched the rich. Republicans could not endorse a policy of government spending for economic- policy purposes because it would enlarge federal-government budget deficits. Both parties desperately needed a way to look busy. By default, they turned to monetary policy; e.g., money creation.

Ironically, Keynesian theory had originally rejected money creation as ineffective, but its practitioners had to abandon that stance for tactical reasons. Now they were backed into the corner of having to rely on it almost exclusively.

The economic theory that had proven utterly bankrupt as economics now became the sole policy tool of both political parties, virtually by default. It had never worked. Nobody in Washington, D.C. really expected it to work. Nobody cared all that much whether it worked or not.

Keynesian economics was in the same position as medicine prior to the eighteenth century. Doctors had few remedies that worked, but they continued to use the ones they had even though they seldom, if ever, cured anybody. If the doctors had admitted the truth, they would have had to stop being doctors. Macroeconomics had established a secure beachhead in the economics profession, with course offerings at every level of instruction, dedicated scholarly journals, major research grants, government positions and a public mission to make the world safe for markets. Admitting the truth about the theory that had midwived all that would have forfeited their gains.

What Time’s the Next Revolution?

So much for politicians, bureaucrats and academic economists. Where does that leave the rest of us? Essentially, it leaves us pacing the streets, looking around nervously, waiting for the next revolution. What we need is the next scientific revolution, and a theory to take the place of the failure being propped up by the Washington, D.C. policy Establishment – a composite version of Frank Morgan in The Wizard of Oz.

Heretofore we have been in denial. We have been telling ourselves that we went through a bad time in 2008, but the worse is over and we’re gradually getting over it now. Only it is now beginning to dawn on mainstream pundits that we’re not really getting over it – that, in fact, we may be getting ready to repeat some of the worst all over again.

We’re starting to realize that hardly a man is now alive who remembers the famous days and years when unemployment wobbled between eight and ten percent for over three years with no sign of relief. Interest rates have never been this low for this long – and what has it accomplished? Amend that slightly – what good has that accomplished? When in peacetime has government debt ever loomed so large? When has regulation bound so tightly? When has freedom seemed so tenuous?

When at last we have mustered the courage to admit the truth, the next stage will be to face the fact that Keynesian economics had no theory of the business cycle as such. Keynesian theory never asked why aggregate demand declined. The question didn’t seem to matter because the answer didn’t affect our course of action, which was to spend ourselves silly until things got better.

Well, we’re silly and they’re not better. Now it’s time to ask what really causes the business cycle. Wisdom begins when we acknowledge that the only time we faced a climate of recurrent limbo such as this one was in the 1930s – after both the Hoover and Roosevelt administration tried every interventionist nostrum under the sun to artificially cure the recession that began in 1929. As Roosevelt’s Treasury Secretary, Henry Morganthau, admitted to his diary, they ended up in 1939 worse off than when they started. Only when FDR himself forsook “Dr. New Deal” for “Dr. Win-the-War” were the chains hobbling American business broken. After World War II, with Roosevelt dead and no sponsor for the New Deal, a Republican Congress and tax cuts ushered in the greatest one-year boom in U.S. economic history.

If we went to the doctor to be treated for a serious illness and he offered us a new drug, how would we react? Would we not ask if it had been tried out? Would we not expect to find a history of successful use? If we found just the reverse – a history of failure – would we not reject the drug? If the only rebuttal argument the doctor could muster was, “Well, we can’t just stand here and do nothing,” wouldn’t we at the very least have the gumption to fire back, “Oh, yeah? Why not?”

This much can be done by any intelligent layman. No Ph.D. in economics is required. Afterward will be the time to grapple with the complexities of intertemporal capital theory and dynamic adjustment, to penetrate the mysteries of the structure of production. You have to learn to crawl before you can walk.

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