Using the Gross Domestic Product to predict freight is inefficient as the GDP measures the size of the entire economy--not just goods that move by truck, according to analysts in a recent teleconference.
MacKay and Co., a consulting firm specializing in commercial on-highway vehicles, employs another way to measure economic activity and how it affects the trucking industry in particular. Their Trucking Economic Activity (TEA) formula measures only those parts of the GDP that are physically moved as freight.
Stuart MacKay, president of MacKay & Co., and Robert Dieli, the firm’s chief economist, spoke about the TEA index and another statistic, the aggregate spread, during the Bear Stearns teleconference entitled “Turn Signals: What is the Freight Economy Saying about Commercial Vehicle Demand in 2008?”
According to the two analysts, both the TEA and aggregate spread have hit their lowest points since the recession of 2000 to 2001.
MacKay said there have been two major factors that have led to the current negative statistics: weakness in housing and retail. “Our data indicates something akin to 8 million loads of freight did not move due to the collapse of the residential housing marketplace,” he said. “80,000 trucks—mostly Class 8—weren’t moving.
“There are two or three significant factors differentiating TEA from GDP,” MacKay continued. “Our objective here is to take out things that don’t move by truck and focus on things that do move by truck. There are essentially five key elements here—consumer goods, investment goods, export, import and government purchases of goods.
“When TEA dips negative, it stays down longer and goes deeper than GDP,” MacKay said. “Goods movement is significantly more subject to the ups and downs of the economy than the GDP because of all of the service activities in GDP, which for the most part don’t vary significantly. Goods movement really does move.”
MacKay added that consumption currently makes up 46% of TEA, investment 24%, exports 13%, imports 11%, and government 7%. “If we’re looking at truck activity in the North American marketplace, almost half of it has been and continues to be driven by the consumer,” he said.
MacKay also said that TEA has been a strong indicator of Class 8 sales, which had four consecutive negative quarters in 2007—not as many as the eight consecutive negative quarters for the recession of 2000 to 2001, but still a troublesome statistic.
Dieli, on the other hand, spoke of aggregate spread, developed by his own company, RDLB, Inc. The aggregate spread consists of the combination of four widely known government data systems--Treasury yields, the Fed funds rate, the inflation rate and the unemployment rate--to produce a forecasting statistic that looks ahead nine months at all times. When the aggregate spread hits 0, it is predicting a recession--a number that has only been reached once since 1992, in 2001.
“The aggregate spread has shown over the past 40 years that when it goes negative, we see the start of a recession and when it turns positive, the end of a recession,” Dieli said.“The signal that we’ve been getting from the model for the last year is one of economic turbulence,” he added. “We have not gotten an outright negative reading from the model, but the levels show that a recession somewhere in 2008 is a distinct possibility.”