Working Iron Blog

Looking at the 2016 trend lines

It’s been a mixed bag for trucking as a whole, and small truckers in particular, here at the tail end of 2015. Freight volumes slowed, tripping a decrease in heavy truck orders – though medium-duty truck orders remain fairly strong at this point.

Still, global oil prices are at their lowest point in nearly 11 years – meaning diesel fuel prices remain on the cheap side. And that’s good for any trucker’s bottom line.

Yet the question, as usual, remains the same at this point in time: Will these trends continue into the New Year? Or will they change, and if so, change radically?

Let’s start with fuel prices, shall we?

According to the Short Term Energy Outlook (STEO) issued by the Energy Information Administration (EIA) in early December, gasoline in particular is projected to stay on the cheap side into the first quarter of 2016.

EIA projects regular gasoline retail prices to average $2.04 per gallon in December 2015 and $2.14 per gallon in the first quarter of 2016. Retail diesel fuel prices, which averaged $3.83 per gallon in 2014, are projected to finish 2015 at an average of $2.71 per gallon and then fall to an average of $2.67 per gallon in 2016.

Lower projected crude oil prices this winter are contributing to a reduction residential heating oil prices – and since heating oil is made from the same base stock as diesel fuel, that should help keep diesel prices down.

Households that use heating oil as a primary space heating fuel are expected to pay an average of $2.40 per gallon this winter, EIA said, which is 64 cents per gallon lower than last winter – reflecting in part the expectation of warmer temperatures this winter compared with the previous season.

Now, how about some “big picture” economic projections?

According to Nariman Behravesh (at left), chief economist for global research firm IHS, the world economy should expand by 2.9% in 2016 with the U.S. economy doing fairly well in what he thinks will be a “decent” year.

“Solid growth in the U.S. and a slight pickup in the pace of Eurozone and Japanese economic activity – combined with an expected easing of recessionary pressures in Brazil and Russia – are among the reasons for this moderately upbeat assessment,” he said in his annual forecast this month.

In the same vein, those low oil prices we noted above plus more monetary stimulus—in particular, from the European Central Bank (ECB), the People’s Bank of China, and possibly the Bank of Japan—will not only support growth, but could also provide the basis for some upside surprises, Behravesh believes.

“U.S. growth will remain solid [with] the underlying fundamentals of the U.S. domestic economy remaining sound,” he explained. “Increases in consumer spending, housing activity, and non-residential capital spending – excluding the energy sector – will all be positive contributors to growth.”

Additionally, thanks to the recent congressional budget agreement, government spending will add to U.S. GDP [gross domestic product] growth in 2016, after being a negative factor for the past three years.

“Europe will keep growing at a modest pace,” Behravesh added, citing four trends supporting this improved outlook: low energy prices, reduced fiscal headwinds, more monetary stimulus, and a weak Euro; with the latter two expected to support growth even more in 2016.

“A weakening currency is providing something of a buffer for the Eurozone from weak global growth,” he noted.

“Unfortunately,”, “there is no shortage of downside risks, including high public- and private-sector debt levels, corporate risk aversion, further weakness in China and other emerging markets, and daunting geopolitical risks,” Behravesh stressed. “This means that the probability of the global economy being stuck in low gear for another year is still uncomfortably high.”

For example, take the projected continuation of economic deceleration for China. After 6.8% growth in 2015, the Chinese economy will weaken further, only growing 6.3% in 2016,” he said.

“While the service sectors are doing well, the industrial sectors, especially heavy manufacturing and mining, are struggling,” Behravesh noted.

He added that since the beginning of 2013, emerging markets have been hit by a “perfect storm” of plunging commodity prices, capital outflows, and plummeting currencies (forcing some central banks to raise interest rates even during recessions), swooning stock markets, and stagnating world trade.

“Those hit hardest have been commodity exporters, especially those with weak finances or other structural problems,” Behravesh stated. “Nevertheless, as commodity prices bottom out in 2016, the pressures on emerging markets will likely ease.”

A few other “Top 10” predictions Behravesh is making for next year include:

  • Some emerging markets will remain in recession, while growth elsewhere will disappoint.
  • Commodity prices will reach a trough. The prices of both oil and other commodities are expected to be flat though the first half of 2016, and then begin to rise very gradually in the second half. [Thus, the low diesel price environment enjoyed by truckers of late may dissipate, albeit gradually.]
  • Any rise in inflation will be modest. A variety of factors have conspired to keep inflation in many parts of the world in check. Principal among these are the large amounts of excess capacity worldwide and the nosedive in commodity prices.
  • The Federal Reserve and the Bank of England will raise interest rates a little, while other central banks will either be on hold or ease more.
  • The U.S. dollar will rise further. IHS expects that the dollar will appreciate another 3% to 5% in the first half of 2016, before topping out. This means that the dollar/euro rate will approach parity by the middle of 2016, reaching as low as $1.02 by midyear.

J.J. Kinahan, chief strategist for TD Ameritrade, echoes some of Behravesh’s prognostications based on his firm’s recent polling of U.S. retail investor.

Kinahan said retail investors remain relatively optimistic about the U.S. economic outlook in 2016, with 50% stating they are optimistic, while another 29% are neutral.

Likewise, investors are maintaining a relatively optimistic view of their personal economies, with 42% saying 2016 will be a better year for them financially than 2015, and 49% saying it will be “about the same.”

Interestingly, Millennials and Gen-X’ers maintain a “particularly sunny outlook,” according to Kinahan, with 11% saying 2016 will be “much better” for them financially, versus just 4% of Boomers and Mature investors, who tended to express a more neutral sentiment.

He added that the retail investors polled by TD Ameritrade are making “a few bold predictions” for the coming year. For example, 37% said technology will be the sector most likely to outperform in 2016, followed by healthcare (30%).

“Today’s investors have a good read on the trends that could guide the markets over the next 12 months,” Kinahan pointed out.

“They see no end to innovation, particularly the ways in which we can use mobile, social and cloud-based technologies, to enhance nearly everything we do,” he added. “They see the jobs reports, the notes from the Federal Reserve, and they feel good about what’s to come.”

Let’s hope those good feelings prove out in 2016.

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