‘No, the sky is not falling’ – A contrarian view on the economy

Last week on DAT iQ Live we interviewed Professor Jason Miller of Michigan State University’s Eli Broad College of Business. He reports that the sky is not falling in regard to the economy, contrary to popular belief in some sections of the media, and he’s seeing a very strong trucking economy at the moment. 

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Here’s an excerpt of the interview:

Dean Croke: Housing starts and permits tumbled in May, so how much will last week’s interest rate hike affect future demand?

Jason Miller: So that is a great question, and I’ll tell you, my crystal ball, I wish it were a bit clearer, but I’ll give it my best. So the first thing to keep in mind right now is that headline data is what we call seasonally adjusted, and what that means is that it’s asking, “Are we following sort of historical patterns?” There’s nothing historical about COVID. So what I like to look at is essentially the not-adjusted data. So looking more at the raw data and especially comparing 2019 and 2018. Because remember, we were in a stimulus-fueled buying craze last year at this time. And when you think of housing, there are really four pieces to it. Permits being issued, how authorizations of permits are in place but not started, starts, and then under construction. When you look at that right now, if we go back to 2018 or 2019, we compare favorably and in many instances. For example, permits in May of 2020 were 95,000. If we go back to May of 2019, they’re only 81,000. So that’s a 15,000 difference. That’s a substantial percentage difference right there.

How’s this authorized-but-not-started? So you’ve got the permit but haven’t even started excavating. If we go back to where we were in 2019, that’d be about 93,000. Right now, today we’re at 157,000. So the number of houses that are authorized to be built but haven’t even started is up 50% from where we were in 2019.

Housing starts is the number that gets most of the attention and came in at 93,600, not seasonally adjusted. Going back to 2018, though, it was at 88,700. So even in this quote-unquote, down market, we’re still starting more houses than we were in 2018 during an obviously very good economic period. And then the one series that I always really focus a lot on is houses under construction. Because once a house starts, you’re going to finish it, and if we look at where we’re at now, at this time in 2019, we were at about 525,000 houses under construction. Today we’re at 820,000. So we’re up an incredible amount. We’re up over 50% in terms of houses that have been started but have not yet been completed.  

I’d frame it as follows: Did things on a seasonally adjusted basis for starts weaken in May from April? Yes. Can we put that much faith in those historical patterns holding? I’m a little more hesitant about that. But in absolute terms, the construction market is far stronger today than in 2019. And it’s looking even better than in 2018. So I would certainly say the data suggests the sky is not falling, and we need to have a pause. 2023 is when there’s a lot more uncertainty because we don’t know what the interest rate hikes are going to do.

Dean Croke: So Jason, that’s an excellent summary and kind of mirrors what we saw in 2018 in the flatbed market when we had a very robust industrial economy, fueled by a range of things, including a lot of building activity, economic stimuli, and changes in the tax code and rallying in oil prices. How do you see the industrial economy in 2022?

Jason Miller: That’s what we’re seeing right now and even on the manufacturing side. Freight weighted industrial production for May this year was higher than in May 2018. And so, in terms of where we’re at for manufacturing output, we are at 2018 levels right now. We’re certainly above 2019, where we essentially started going into a small industrial recession.

Dean Croke: There are some signs that the flatbed market is weakening with deflationary pressure on spot rates even with such a strong manufacturing economy, so what would you say to those who think the sky is falling? 

Jason Miller: The big thing is capacity right now, and we know employment in truck transportation is up 5% at least from last year. And that’s the other thing I will keep stressing when people say volumes are plunging. It’s like, well, then why are trucking companies adding a lot of employees right now? The reality is demand is higher this year on an absolute number of loads compared to last year, but the growth rate of demand has slowed substantially, to the point that the capacity side is starting to catch up. 

We knew at some point the industrial economy was going to switch back on, and we knew that consumer spending would stall out eventually, which appears to be what has happened. It stalled out at incredibly high levels and is still way above the pre-COVID trendline. But we have not seen any year-to-year growth in retail trade sales this year to last year once you remove inflation. And so you had a lot of capacity with lower demand on lanes, and suddenly, you’re going to start having rates come down.

Dean Croke: Seeing you’ve still got your crystal ball, what do you see now?  

Jason Miller: The one thing I keep looking at right now is credit card spending data from the Bureau of Economic Analysis. They have a unique way of doing it, and rather than going to a single bank; they have data from the largest payment processors. The one thing that keeps emerging to me as I read about this mythical trend transition from goods to services. It’s not there. It is just not showing up that service spending is going back to 2019 levels. It’s just not happening as you can see spending on recreation and accommodation is still 7-10% below where it would be predicted to be. In contrast, building material sales are up 38% in June of this year, from where they would be predicted to have been based on the prior ten years of history. 

You can hear the complete DAT iQ interview here and a longer interview with Dr. Chris Caplice on the Freightvine podcast.

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