If it walks like a recession and talks like a recession, is it necessarily a recession? No. If we try hard enough, however, we can talk ourselves into one.
The housing market is certainly facing it own recession. The continued slide in housing starts, coupled with the reduced value in assets held by homeowners, has been in place for several quarters and is forecast to remain in a declining state well into the year. No matter how one cuts the data, this sector is in a recession.
The news media will focus on this weak market — and rightly so. For many households, the American dream has become a nightmare. But the media is not discussing how this market, and others, can return to an expansion mode. We have not seen the bottom of the housing market in this country because there are still homeowners out there who want to sell their property but are having little, if any, luck in doing so.
Another indication is the fact that homes that are “for sale by owner” are not part of the industry's official inventory reports. Consequently, these industry reports are grossly understating the actual supply of homes for sale. While current reports point to a 10-month supply, it's probably safe to say that there is really a 14- to 15-month supply.
As a result, the best we can hope for at the end of the second quarter this year is that the inventory of homes for sale returns to a six-month supply. And if we take into consideration all of the homes that are “intended for sale,” we probably won't see that six-month supply level at all in 2008.
The bottom line is that although there will be pockets of strong demand for housing, it will be too weak to add to the growth of the economy in the coming months.
Turning to the auto sector, we will probably see a two-quarter downturn as buyers are looking for equipment that is not yet readily available. It will be 2009 before hybrid models will be widespread among all manufacturers.
However, leasing has come back strong as a way of keeping new-car demand from falling further. It's important to note that the last time there we saw significant leasing it was associated with a significant loss in residual values as equipment came off lease. Unfortunately, we have no reason to hope that this won't happen again.
For-hire trucking certainly experienced a recession last year. Since the fourth quarter of 2005, there has been a reduction in the American Trucking Assns.' Trucking Activity index for each successive quarter, with the exception of the first quarter of 2007. That means that six out of the most recent quarters were in decline. Hopefully, we'll see a turnaround by the end of the second quarter this year.
For-hire is the trucking sector that usually sees the most change in demand during a business cycle. Private fleets that use some for-hire services will cut back on the for-hire activity before they reduce their own. That's not to say private carriage doesn't feel the freight decline, but it does so to a lesser extent than the for-hire side of the industry.
The situation would be worse if the for-hire sector maintained its use of intermodal during difficult times. However, for-hire carriers usually maintain their existing capacity utilization by reducing the amount of intermodal transport they use. This enables them to keep key personnel, i.e., drivers.
One thing that makes this round of truck-traffic softness unique is that it's happening on the heels of a significant pre-buy, which took place in anticipation of EPA's '07 emissions rules. The upside to recent truck equipment markets was remarkable in terms of sheer volume; the downside will be remarkable for its lack of volume.