U.S. Economy Searching for its True North - Tire Review Magazine

U.S. Economy Searching for its True North

By Dr. Timothy Nash and Dr. Keith Pretty

The latest revision of first quarter 2015 U.S. GDP was revised upward to 0.6% with the first estimate of second quarter U.S. GDP reported at 2.3% growth as of July 31.

Early estimates predicted that GDP would improve to perhaps as high as 2.4% growth in the second quarter based on the Atlanta Federal Reserve Banks GDPNOW forecasting tool. It is important to note that since the GDP came in at 2.3% in the second quarter, average GDP now stands at a disappointing 1.45% growth rate for the first half of 2015, well below the 3.2% average annual growth rate for the U.S. economy since the end of The Great Depression.

In fact, U.S. GDP growth has averaged a dismal 1.8% since the beginning of 2009, the worst seven-year period since the end of World War II. At the time of the writing of this article, the Dow Jones Industrial Average closed at 17,568 down more than 1.5% since its Dec. 31, 2014 close. [Editor’s Note: The Dow closed at 16,624 on Sept. 9.]

The U.S. economy continues to try to find clear-cut direction, it’s true north. Mixed signals are abound as much of “your” perspective depends on where you live and/or for whom you work. Bankers are generally optimistic as a result of historically low interest rates that are the direct result of Federal Reserve monetary policy and quantitative easing. The result: the cost of financing a new automobile, a new home or refinancing an existing home are at or near all-time low interest rates.

The aforementioned has helped to make up for poor income growth and below average GDP growth over the last four years. U.S. new automobile, light truck and SUV sales continue on a pace to surpass 2014 levels, with sales at the end of June more than 350,000 vehicles sold ahead of the midway point in 2014.

Retail sales continue to lag as does consumer spending for the first half of 2015, while real estate and general manufacturing show erratic patterns and no clear direction thus far in 2015.

To get a better handle on current and future direction of the U.S. economy, we will briefly examine global GDP growth, global corporate income tax rates, average annual price of oil, average U.S. national debt, U.S. average household income growth, and finally the relationship between government, households, and business.

Components of the Forecast

Click to enlarge chart.
Click to enlarge chart.

The U.S. economy has grown at a slower pace than the global average and certainly slower than China since 2000. The U.S. economy has grown at an average rate of 3.2% since the end of World War II, yet is only growing at roughly 2% since the U.S. economy began its Great Recession recovery in 2010. Many experts believe that an enhanced regulatory and tax burden over the last decade is responsible for slowing growth in the U.S. relative to the rest of the world (see Chart 1).

Perhaps the most important debate that must take place in Washington, D.C., in 2015 is the one surrounding the U.S. competitiveness and tax reform. The U.S. remains the largest and most competitive economy in the world, but as depicted in Chart 1 is at a tremendous tax disadvantage relative to the rest of the world.

Click to enlarge chart.
Click to enlarge chart.

Based on the data provided by KPMG, one of the world’s foremost international tax firms, U.S. businesses are at a competitive income tax disadvantage by region, globally, and certainly as a country. According to KPMG, the U.S. at 40% has the highest average income tax rate in the industrialized world. Pro-business tax reform in the U.S. is a must, if American businesses are to compete, thrive, and grow in the ever-complex global economy of the future.

In addition, the Patient Protection and Affordable Care Act (ACA) continues to be debated for its efficiency and effectiveness. What many Americans do not realize is that there were numerous tax increases outlined in the act to pay for its implementation.  The top Medicare tax rate went from 1.45% in 2013 to 2.35% in 2014.

The top personal income tax bracket went from 35% to 39.6% as a result of the law, with top income payroll tax rates, capital gains tax rates, dividend tax rates and estate tax rates all increasing dramatically as a result of the passage of the ACA (see Chart 2).

Click to enlarge chart.
Click to enlarge chart.

Global oil prices as measured by West Texas Intermediate Crude (WTIC) averaged well under $20 a barrel during the 1990s. Increased global demand, inflation and military conflicts drove oil above $140 a barrel in 2008. A slowing global economy, enhanced fuel efficiencies and the use of new technologies, such as wind, solar and especially hydraulic fracturing have increased the supply of electricity, oil and natural gas, particularly in the U.S.

With WTIC below $50 a barrel in July 2015, long-run lower oil prices – if sustainable – should bode well for the U.S. motor vehicle aftermarket and the roughly 258 million automobiles, light trucks and SUVs it serves (see Chart 3).

The Impact of Debt

Another major issue presenting problems for the U.S. is our growing national debt. The U.S. national debt stands at roughly $18.6 trillion as of the end of July 2015. From 1776 to 1982 the total U.S. national debt stood at just under $1 trillion dollars, but has increased 18 fold in just under 33 years.

Click to enlarge chart.
Click to enlarge chart.

Our current national debt is roughly 103% of the last twelve months of U.S. GDP. Roughly one-third of the total U.S. national debt is owned by foreign countries, with China owning $1.3 trillion and Japan owning $1.2 trillion.

It is estimated that nearly $430 billion dollars will be spent simply paying interest on the U.S. national debt in 2015. According to the Government Accountability Office (GAO), if growth in government spending and government deficits continue at their current pace, the U.S. government will only be able to fund social security, Medicare, Medicaid and interest on the national debt by 2030. If GAO assumptions are correct, we will have no revenue to pay for road building and maintenance, national defense, education, NASA, etc.

It is clear the U.S. has a spending problem that must be addressed or we are only decades away from facing the financial problems that burden many European economies (see Chart 4).

Click to enlarge chart.
Click to enlarge chart.

Average U.S. household income adjusted for inflation is lower today than it was in 2000 and 2005 and barely above 2010 levels, based on most recent data from the U.S. Bureau of Labor Statistics. Declining household incomes, the lowest labor force participation rate since the late 1970s and the low pace of quality job creation have left American households with a declining or flat standard of living over the last decade (see Chart 5).


Click to enlarge chart.
Click to enlarge chart.

We believe the U.S. economy will grow at an annualized rate of between 2.0%-2.3% for 2015 and between 2.0%-2.2% in 2016. Low interest rates and declining oil prices will be keys for continued U.S. growth in 2016.

It is our opinion that bipartisan cooperation must return to Washington, D.C., and pro-business, corporate tax reform and government spending constraints must be adopted in 2016 if the U.S. is to return to its average growth rates of 3.2% or higher in subsequent years (see Chart 6). 

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Retreading Faces Pressures

  When I was asked to contribute an article forecasting what the future held for the truck tire retread market during the next 12 months the first thought that came to my mind was “China.” Although I am writing this while sitting in my office in California, I am well aware that Tire Review has

When I was asked to contribute an article forecasting what the future held for the truck tire retread market during the next 12 months the first thought that came to my mind was “China.”
Although I am writing this while sitting in my office in California, I am well aware that Tire Review has readers in many countries outside of North America, and based on both my travels and speaking to many of our members worldwide, I know that China comes to the forefront in nearly all of our conversations with retreaders.
The low price of Chinese medium truck tires is giving many of our retreader members fits, especially when they receive emails soliciting them to buy popular size truck tires at prices that are often actually lower than what they charge to retread a similar size.
I have a number of additional emails from various companies in China offering similar sizes and pricing. Pretty scary.
Since these emails are often finding their way to trucking companies, they become very tempting to fleet managers when they see that they can buy a new radial tire for less money than they pay to have their tires retreaded. Sometimes even less than a retreadable casing.
As we know from past experience, many of the low price “no name” Chinese medium truck tires turned out to be a very bad deal for the trucking companies that bought them, and, in the short term at least, the trucking companies that have had negative experiences decide to not touch a Chinese made truck tire ever again.
But the Chinese are not dumb, and they quickly realized that they had to improve their quality if they want be able to continue to sell their low-priced truck tires in other countries.
So we are now seeing an improvement in the quality of radial medium truck tires produced by many Chinese truck tire manufacturers. In fact, many brands of truck tires – steer, drive and trailer axle radials – produced in China are now SmartWay-verified (for a current list of SmartWay truck tires, contact the Retread Tire Association by phone to 831-646-5269 or by email to [email protected]).
As a matter of interest, our association, in addition to having scores of retreader members, has many casing dealers as members and for those of you on our mailing list, you know that over the years we have published hundreds of RTA Casing Memos for our members (both casing dealers and retreaders) who want to either buy or sell truck tire casings.
At one point in time we were publishing RTA Casing Memos on an almost daily basis, but in recent months the number of RTA Casing Memos we publish has dropped dramatically, and we can only attribute this drop to the fact that new Chinese truck tires at extremely low prices has had – and continues to have – a serious detrimental effect on the sale of retreadable casings.
We know this based on the many conversations with our members who are looking to us for help with the problem. Regrettably, we have to inform them that it is not in our power to help and we can only suggest that they contact their congressmen and air their complaints about how the low-priced new Chinese truck tires are affecting their business.
Before I move on, there has been a sea of change in the quality of many brands of Chinese truck tires, and a number of our members have reported that they now are having no problems with these brands and that in addition to providing good performance they are very retreadable.
The good thing about the quality improvement of these new truck tires being produced in China is as the quality improves, the price rises, bringing them very close to Tier 3 tires produced in other countries, including in the U.S.
Only time will tell whether retreaders in North America and other countries throughout the world can learn to live with the influx of Chinese truck tires because they are not going away.
Improvements in Quality
I try to speak to a few of our retreader members weekly and one of the questions I always ask is how low is their adjustment rates. Before going on, let’s define “adjustment.” It does not necessarily mean that one of their retreads is going to fall apart causing serious damage. Rather, it might mean that for some reason the retread in question is not handling well or might not be holding air, etc.
In many cases, I am hearing that their adjustment rate is 1% and most of our members actually report that their adjustment rate is even less.
A story I like to tell: A while ago I was visiting the retread plant of one of our very large members and while walking through his retread plant, which produces an average of 500 truck tire retreads daily, I said to the plant manager, “I bet I can tell you what your adjustment rate is.” He said, “Go ahead.” I said, “It’s under 1%.”
“You lose, “ he said. “It’s under 0.5%.” When I asked how he was able to keep it so low he stated that every tire was subjected to shearography testing during the retread process and then again before leaving the plant. The adjustment rate in this plant is close to zero.
Thanks to technologies such as shearography, X-ray, and non-destructive testing, retreaders are producing a better quality product than ever before.
However, there are still too many ex-users who will not touch a retread because of past problems years ago, and it is our job, along with other associations, to continually tell the story of how top quality retreads produced in modern top quality retread plants can reduce their tire costs while delivering the same safety, performance and handling as higher-priced new tires.
We will probably always also fight the battle of explaining why there is so much tire debris (road alligators) on our highways. We in the retread industry know that these road alligators are nearly always caused by improper tire maintenance – underinflation, overloading, mismatching of tires in dual wheel positions, etc. But fight it we will, by publishing news releases and articles explaining that retreads are not the cause of this tire debris and to blame retreads for road alligators is the same as blaming a vehicle for an accident caused by a drunk driver. The blame is simply misplaced.
Knowledge IS Power
I like to think that I know a fair amount about tires and although I’m not the smartest guy on the block, I do know that I can always learn more, which is why I want to tell you about a really great article entitled, “The Facts Behind Low-Rolling Resistance Tires,” which appeared in the February 2015 issue of The Trailblazer, a publication of the Technology & Maintenance Council (TMC) –American Trucking Associations.
This article opened my eyes to many facets of low rolling resistance tires that I never had thought about. To obtain a copy of this article, contact the TMC at 703-838-1763.   
Another good source of ongoing information about tires, including retreads, is to subscribe to at least two or more trucking magazines. I know that too many retreaders do not even know the names of the major trucking magazines. A quick Google search will provide you with the names of five or six top-of-the-market magazines.
I hope you have gained a bit of knowledge by reading this article, and I will leave you with my offer to always try to be helpful with additional information about retreading and also about the Retread Tire Association.

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