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The Long Story Short: It’s early, but initial signs should give investors some caution
(Note: companies that could be impacted by the content of this article are listed at the base of the story (desktop version). This article uses third-party references to provide a bullish, bearish and balanced point of view; sources listed in the "Balanced" section)
Freight shipments fell 5.3% in June after having fallen 6.0% in May. June was the seventh month in a row of year-over-year declines. Transportation is viewed as a leading indicator of the economic activity because it reflects buyer optimism regarding the future. A study by the Bureau of Transportation Statistics estimates that transportation volumes lead business cycles by approximately four months. Should investors view the decline in transportation shipments as a sign of upcoming economic weakness or even a recession?
Transportation shipment declines may be related to political activity that could reverse quickly. The decline in the aforementioned leading indicators (domestic shipments, durable goods orders, consumer confidence, and international shipments) may be due to increased tariffs between the U.S. and China. Should the U.S. and China come to an agreement to lower tariffs, it is possible that these indicators would reverse course and improve.
A shift towards a gig economy may not be reflected in traditional transportation measurements. The Cass Transportation Index and the Freight Transportation Services Index do not include courier services or the US Postal Service. As the economy becomes more global and shifts to a home-delivery economy, traditional transportation indices may underrepresent economic activity.
The Fed is taking steps towards easing. The Federal Open Market Committee (FOMC) is meeting July 30-31. Chairman Powell gave strong hints at a cut in the discount rate in a recent presentation to Congress. His comments were echoed by several Fed Presidents. The implementation of an expansionary monetary policy by the Federal Reserve would work to encourage economic activity.
Spot shipment prices are also declining. After years of expanding to keep up with a growing economy, the transportation sector now faces overcapacity. The fact that falling prices (shipping rates) has not led to increased quantities sold (shipping volumes) is a sign that the decline has broader economic implications.
The decline matches a decline in durable goods orders. Orders for durable goods fell 1.3% in May. The decline follows a 2.8% drop in April. What’s more, inventories are growing. Inventories of manufactured durable goods have risen ten of the last eleven months even as new orders fall.
Consumer confidence is also declining. The Conference Board’s consumer confidence index declined to 121.5 in June. The drop brought the index to the lowest level since September 2017. Together, the declines are troublesome because they show that consumer concerns extend beyond the corporate world.
International shipping is declining as well. The United States is not alone in witnessing a decline in shipping activity. Other parts of the world, specifically Europe and Asia, are also seeing a slowdown. A slowdown in the global economy will undoubtedly affect US exports, furthering domestic economic weakness.
All joking aside… An old joke says that economists have predicted ten of the last five recessions. The same can be said for leading indicators such as freight shipments. The current decline is certainly no guarantee of a recession. That said, the fact that shipment weakness is combined with declines in so many other leading indicators should give investors pause. It may take the action of external forces (i.e. the Fed or trade negotiations) to steer the economy back on course and continue its unprecedented run of economic prosperity.
Transportation Recession Gets Uglier, Wolf Street, July 15, 2019
Research Confirms Transportation Index As Leading Indicator, Bureau of Transportation Statistics, December 15, 2017
Stocks Are Signaling Recession Scare But That Doesn’t Mean There Will Be One, CNBC, December 28, 2018
Transports Show No Recession Threat, Seeking Alpha, April 3, 2019
Freight Transportation Services Index, Federal Reserve Bank of St. Louis, July 11, 2019
Cass Freight Index Indicates Economic Contraction May Have Begun, The Trucker.com, July 16, 2019
Freight Volumes Shrink As World Economy Stalls, Reuters, July 12, 2019
US Durable Goods Orders Drop for 2nd Straight Month, Trading Economics, June 26, 2019