Economist Donald Broughton of Broughton Capital, says it is his job to make you feel uncomfortable by challenging everything you’ve heard about the economy. Speaking Aug. 16, 2018 at the HELP Inc. Board meeting in Billings, MT, Broughton delivered. HELP Inc. is the provider of PrePass services.
For example, he pointed to last quarter’s 4.1% annual growth rate in the nation’s gross domestic product (GDP). He said it was understated by at least one percentage point. Why? Per Broughton, the Keynesian economic models traditionally used say that all exports are good, all imports are bad, inventory build-up represents a robust economy, while inventory draw-down, as happened last quarter, is a drain. But, looking at the trucking fleet representatives in the HELP audience, Broughton noted that goods moving out of inventory are actually on trucks, heading to the marketplace, and that’s a good thing.
While Broughton rejects the ideas of influential economist John Maynard Keynes, he embraces Intel co-founder Gordon Moore of Moore’s Law. In 1965, Moore’s Law stated that computing power (originally, the number of transistors on a computer chip) doubles every 18 months while the cost of that computing power is cut in half. We are in the “Technology Age,” said Broughton, and Moore’s Law is profoundly deflationary, with impacts that ripple through the economy.
For example, Broughton noted the Federal Reserve once addressed inflation through monetary policy, but the correlation between the supply of money and inflation rates was lost by the 1990’s as technology allowed the economy to do more with less. Broughton’s conclusion: “Inflation is dead on arrival.”
According to Broughton, technology has also driven “disintermediation” – the removal of the middle man between producers and consumers, with a consequent deflationary reduction in prices. Applied to labor costs, technology has allowed workers to live in remote, lower-cost locations even as work quality and activity is closely monitored. The historical trend of agricultural and manufacturing activity to move to low-cost locations overseas is now being disrupted by the infusion of capital and higher technology close to the consumer. In fact, said Broughton, where technology runs the manufacturing plant floor, there is no labor cost.
Broughton also discussed how there are three economies. Most pundits focus on the consumer economic cycle, which budged little from 2009 to 2016. But there are also industrial and technology economic cycles to watch, and there the U.S. is thriving. Broughton said that the U.S. is the dominant player in technology, both in innovation and in manufacturing. Industrial recovery in the U.S., on the other hand, was led from 2009 to 2014 by fracking, which allowed the U.S. to move from a net importer to a net exporter of oil and natural gas.
To measure growth in the industrial economy Broughton looks at transportation and freight. There, all segments of the trucking industry are showing expansion in line with a 5.1% true growth in the GDP last quarter. Broughton pointed to the electronic logging device (ELD) mandate and the anticipated impact on productivity. And, yes, his charts showed a hiccup at first, until fleets and drivers learned to use the information captured by ELDs to perform more efficiently. His conclusion is that the data visibility from ELDs will in time offset the loss of “flexibility” (adjustments, especially for shipper detention time) offered by paper logs.
Turning to the railroads, Broughton saw growth in chemical carloads, commenting that nearly all industrial production requires chemicals of some sort. There is also an upswing in the transportation of construction materials, by both rail and truck, which, Broughton said, brings us back to the consumer economy.
Stagnant from the beginning of the economic recovery that started in 2009 through 2016, consumer spending grew in 2017. Why? Millennials reached the “MOOB” (Moving Out of Basement) stage, began to get married and create new households. Household formation, Broughton said, is followed by increased consumer spending. Home Depot and Lowe’s, for example, claim 50% of their sales are to folks within 12 months of a housing change. Car sales to new households are quadruple the rate of other sales. So called “big box” store sales are declining, but the slack is being made up by e-commerce, where the Millennials live. Millennials are also tech-savvy, which generates more sales as Moore’s Law brings more powerful, cheaper new products and Millennials dispose of the old. That, in turn said Broughton, increases demand on truck volumes.
The bottom line, according to Broughton, is we are not late in the economic cycle and we are not facing impending inflation. But predicting the future does come with some caveats and cautions. Broughton reiterated that we are in the “Technology Age” and but also pointed to Alvin Toffler’s book, “Future Shock.” Toffler wrote that there are three stages to technology: production in a laboratory setting; mass production; and acceptance into everyday life.
According to Broughton, technology can drive our economic future, but acceptance into everyday life is the key. For demographic sectors of our population, change is scary, and technology represents change. Change also destroys brand loyalty. While that in itself is deflationary, loss of brand loyalty leaves some people feeling unanchored. Meanwhile, our media constantly tells us what we should worry about, which works against wealth creation, which requires risk. And then, as in all of life, there is the “Law of Unintended Consequences.” Who figured that Adobe technology would actually increase the use of office paper or that the ease of communication via social media would lead to a decrease in social skills?
With all these caveats in mind, Broughton made his predictions for trucking and the economy for 2018-2020:
- The market for truck drivers will remain tough… until it doesn’t. Broughton said the technology for fully autonomous trucks will be ready this decade, but the timeline for societal acceptance and new rules for liability, insurance and indemnification is unknown.
- The demand for truck capacity means that fleet pricing will increase. Fleets will use that money to attract and retain drivers.
- Consolidation in the trucking industry will continue. Broughton said business relationships matter. The touted “Uberization of freight” will only affect the spot market, where those business relationships do not exist.
- ELDs, as mentioned, will become a source for fleet and driver data, which will be used to shine a spotlight on shipper detention and other inefficiencies.
- The U.S. economy, with technology, industrial growth and the maturation of Millennials, looks positive. The one dark cloud Broughton sees is trade wars. “Let us hope, he said, that the president is a good negotiator and that the free market is left to do what only it does best.”