November 2019 Volume 1

ECONOMIC UPDATE

residents as one of their fastest growing sectors. The second issue is that millennial buyers are still showing some reluctance to buy homes and when they do decide they have less money to work with. This kind of slump has a greater impact on the economy than slumps in the new home sector. Will China Mollify the Protestors? The protests in Hong Kong are now in their fifth month and that presents China with a major problem. It was assumed that these demonstrations would end rather quickly. The Chinese would show force and that would be enough to get the protests to end. That has not been the case and now China is faced with making a choice. There has already been one round of concessions as the government agreed to scrap the law that would have allowed the Beijing authorities to extradite people from Hong Kong for trial in China. That was not enough as the protestors had moved past that demand to one that involved removing Emily Lam as the head of the Hong Kong government.That is now the offer China is making – provided that Xi Jinping approves. She would be removed by March of next year. Analysis: It is not at all clear this will be enough to halt the protests. The demands have now expanded far beyond the original goals and many are holding out for real and complete democratic control of the city. That will never be granted by China and that creates a very dangerous impasse. The question now is whether the protest groups fragment. It is very hard to determine just what the average resident of Hong Kong is feeling – polls are illegal and reporting is next to impossible. There are not even official spokespeople for the protest groups or rather there are many and nobody really knows who represents what. As near as can be determined, the population falls into four groups. There are those that are against the protests altogether and support the mainland position. They may be as many as half the population or as few as a quarter. The next group is made up of people who don’t have a position one way or the other and just want things to calm down – maybe 20% of the population but made up of the business community. The third group wants change but will settle for incremental progress such as getting a new leader and rescinding the worst of the mainland rules. This may be 20% or so of the population. That leaves the most hard-line of the demonstrators who want nothing less than autonomy or independence for Hong Kong. They are in the distinct minority – perhaps no more than 5% but they have been leading the protests and will not be controlled without the use of force. If the police and military crackdown on this group too aggressively there is the risk that people who have not been as radical will become more aggressive in response and China will face the need for a major and likely bloody crackdown. IsThere Still a National Truck Driver Shortage? We have a client that asked us that question. The answer to that question is yes and no. On a national basis, driver conditions could be considered to be fairly balanced right now because the freight sector is essentially in a secular recession. It stems from the inventory

imbalance problems that we talk about often. When you dive deeper into the data, you discover that there are still some severe pockets of driver shortages and tight capacity around the country. It’s not nearly as prevalent as it was last year at this time (which is a statement in and of itself!), but there are still some chokepoints. Twenty states have the second highest level of driver shortages around the country with between 2.6 and 5.4 loads for every available truck. Just 3 states have the maximum amount of shortages with more than 5.5 loads for every available truck. It may seem odd to you that Idaho, North Dakota, and New Mexico would be the tightest states at this time, but it’s because of harvest time and dislocated capacity in other markets.

Truck driver shortages are still chronic. As long as the construction sector continues to do well, trucking will have a tougher time encouraging CDL drivers to get into the long-haul sector. Staggering Change in Class 8 Truck Orders. If you watch large truck orders (Class 8’s), there has been a significant drop-off in those orders. For the first time in more than 29 months, Class 8 orders dipped and went negative in September. The outlook for 2020 might be worse, with some forecasts suggesting that orders could fall more than 37% Y/Y. Domestic Economic Issues The Black Owl Report: An Executive Intelligence Brief Confidential – Armada Executive Intelligence Brief – Confidential - 3 - Wolfe-Trahan (www.wolferesearch.com) predicts that Class 8 production and output will drop from 2019’s estimate of 348,000 units to less than 220,000 next year. There is a combination of factors at work here. The transportation sector has certainly been in a secular recession over the past two quarters. Overblown inventory building activity as companies worked to get ahead of tariff risk has led to some stagnation of the reorder cycle and slowing of supply chain activity. We’ve written much about it. However, trucking firms are reducing their capital expenditures as mentioned prior, and that’s showing up in a reduced volume of Class 8 orders. There was also a manufacturing backlog with orders from last year and many companies took steps to work around it with

FIA MAGAZINE | NOVEMBER 2019 23