Market Analysis: Mixed signals from many different economic and transportation indicators
The economy continues to send a wide variety of mixed signals as to the future direction. Overall, these signals do not appear that the US is likely to enter into a recession in the near term. Instead, GDP growth will probably fall somewhere around 2.0 percent for the last half of 2019 and below 2.0 in 2020. Please follow the analysis of the attached graphs from Dr. Pohlen.
The economy continues to send a wide variety of mixed signals as to the future direction. The charts in the attached file reflect this situation with what appears to be very contradictory information.
Slides 3-7 reflect the relationship between gross domestic product (GDP) and transportation. Prior to the great recession in 2008-2009, transportation volumes began to fall off considerably in 2007 signaling a change in the economy, particularly in the manufacturing sector. In 2008, the US entered a major recession which lasted into 2009. Since 2009, the country has entered its longest period of economic expansion in history spanning over 124 months. However, this expansion has been marked by many periods of very low growth. Projections for the remainder of 2019 and into 2020, indicate GDP growth below 2%.
Everything appears to hinge on China. In slide 8, US exports and imports are compared for the last several years. Negative year-over-year (YOY) percent changes have occurred when the country was in a recession, or in the case of 2016, when manufacturing had a mini-recession. However, consumer spending was sufficiently strong to ensure economic expansion occurred. From slide 6, consumer spending accounts for the largest proportion of US GDP. US trade appears to be turning negative again in 2019. Trade with China is the principal reason. Due to the “trade war” with China and the tariffs imposed by both countries, US-China trade has sharply fallen and turned significantly negative on a YOY comparison. Successful trade negotiations have the potential to create a major turn-around, but with a very slow growing economy the effect may not be that substantial on transportation volumes.
Since consumer expenditures represent such a large proportion of GDP, changes in consumer spending can either accelerate the economy or push it into a recession (slide 9). Currently consumer confidence remains quite high (slides 10 and 11) but has begun to fluctuate and level off. When consumers are working, they tend to be more confident and spend. The very low unemployment rate of 3.5% is bolstering consumer confidence and spending. The shaded areas on these charts demonstrate how significantly consumer confidence falls during recessionary periods.
Although manufacturing does not represent as large a segment of our economy as in previous decades, manufacturing does impact employment and consumer confidence. When manufacturing contracts, workers are laid off, furloughed or work less hours resulting in less spending and lower consumer confidence. This situation explains why the Dow Jones experienced a major drop on October 1st when the Institute of Supply Management (ISM) released its monthly Purchasing Managers Index (PMI). For the second month in a row, the PMI fell below 50 signaling contraction in the manufacturing sector (slide 12). These two months follow several months of decline. The Non-Manufacturing Index (NMI) for the services sector is also reflecting a similar trend.
Other manufacturing indicators (slides 13-16) suggest a slow down in the manufacturing sector. The inventory-to-sales ratio shows a climb in inventories which usually results in less manufacturing activity until inventories are reduced. The Empire State Manufacturing Index and Manufacturing Capacity tracked by the Federal Reserve appear to indicate that manufacturing activity is indeed slowing.
Leading economic indicators reported by the Conference Board and the Federal Reserve (slides 17 and 18) do not suggest that the overall economy appears headed for a recession. Both indices remain high and have not inflected downward. However, they may have leveled off suggesting slow to no growth in the near term future. The Federal Reserve continues to forecast a low likelihood of a recession in the short term (slide 19).
Shipping and freight volumes indicate a “transportation recession” is taking place. Much of the drop in freight volumes can be directly attributed to the trade war. Container imports and exports (slide 20) at both east and west coast ports have shown a negative trends with several months having negative YOY comparisons.
Rail volumes, and particularly intermodal, reflect the drop in international container volumes entering or leaving US ports (slide 21). Both overall rail car volumes and intermodal car loads for 2019 are below 2018 and 2017 levels. Chemical volumes tend to track more closely with industrial activity, and have not changed noticeably on a YOY basis.
Trucking spot market rates and volumes have shown a similar trends (slides 22-27). The ATA truck tonnage index continues to climb (slide 22) but when compared on a YOY basis the amount of growth is slowing. The Cass Logistics Freight Index and Truckload Linehaul Indices have both inflected negative for the past several months. The spot market rates reported on Truckstop.com are also showing a decline in rates, with rates below 2017 levels.
The one “bright spot” in this set of indicators is e-commerce. Sales continue to expand at a double digit rate (slide 28). Consumers continue to value the convenience of on-line shopping and the accessibility to a wide variety of products from mobile devices. Armstrong & Associates has identified e-commerce as a major potential growth area for third party logistics providers. However, the challenge will be the high cost associated with last mile deliveries. Amazon has reported distribution and fulfillment cost exceeding 25% of net sales in their last several annual reports. We can expect to see continued efforts to increase e-commerce volumes to individual residences in order to reduce logistics costs on a per unit basis.
Domestic air cargo (slide 29) has also benefitted from the growth in e-commerce with YOY increases exceeding GDP growth over the past several years. This situation will likely continue as long as consumer confidence remain high and spending continues.
Overall, these signals do not appear that the US is likely to enter into a recession in the near term. Instead, GDP growth will probably fall somewhere around 2.0 percent for the last half of 2019 and below 2.0 in 2020. However, a trade agreement with China could cause a bump in economic growth, but it probably will not be of a sufficiently large impact to raise GDP much above 2%. Rail volumes will likely level off and would be a major beneficiary of a trade agreement with China as increased imports would drive higher intermodal volumes. Trucking on the other hand will continue to experience lower rates due to a large amount of available capacity and no increase in demand anticipated in the near term. Until capacity exits, trucking rates will likely remain soft, especially for TL carriers. Domestic air cargo will continue to show YOY growth but at a slower level, especially if consumer confidence declines or unemployment increases. Third-party logistics providers will make stronger moves into the e-commerce market to take advantage of the growth opportunity, especially with other transportation and logistics segments showing low growth.
Download the Presentation here: The Economy and Implications for Logistics and Transportation by Dr. Pohlen
Authored by Dr. Terrance Pohlen.
Terrance (Terry) Pohlen, PhD, is a professor of logistics and the Senior Associate Dean, College of Business, University of North Texas. He is the founding Director of the Jim McNatt Institute for Logistics Research and served for twelve years as the Director of the Center for Logistics Education and Research at UNT.