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RECESSION WATCH
Economic Outlook from Freight’s Perspective Negative Volume Concerning, Beginning of Economic Contraction?
I criticized last month’s Cass report as being a little too hopeful in the face of deteriorating data. This month, Don Broughton is much more concerned:
The continued decay in the Cass Freight Shipments Index is beginning to give us cause for concern. (…)
Beyond our concern that the Cass Freight Shipments Index has been negative on a YoY basis for the third month in a row,
- We are concerned about the severe declines in international airfreight volumes (especially in Asia), and the lackluster railroad volumes in auto and building materials;
- We are reassured by the sequential increase in the Cass Freight Shipments Index (up 4.0%), and the volumes in U.S. domestic trucking (especially in truckload dry van);
- We are closely watching the volumes of chemicals and other shipments via railroad, as they have lost momentum in recent weeks, and may give us the first evidence of the global slowdown spreading to the U.S.
Bottom line, the data in coming weeks will indicate whether this is merely a pause in the rate of economic expansion or the beginning of an economic contraction. If a contraction occurs, then the Cass Freight Shipments Index will have been one of the first early indicators once again. (…)
Asian airfreight volumes were essentially flat from June to October 2018 but have since deteriorated at an accelerating pace (November -3.5%, December -6.1%, January – 5.2%, February -13.6%). If the overall volume wasn’t distressing enough, the overall volumes of the three largest airports (Hong Kong, Shanghai, and Incheon) are experiencing the highest rates of contraction. Even more alarming, the inbound volumes for Shanghai have plummeted. This concerns us since it is the inbound shipment of high value/low density parts and pieces that are assembled into the high-value tech devices that are shipped to the rest of the world. Hence, in markets such as Shanghai, the inbound volumes predict the outbound volumes and the strength of the high-tech manufacturing economy. (…)
While we are closely monitoring these trends and looking for signs of contagion, we are not yet finding much materially meaningful evidence of it. We continue to see the current scenario as most analogous to the 1997-1998 Asian currency crisis, but are ar more concerned about the potential for recession in both Europe and Asia.
(…) even if it is at a slower rate, as long as the volume of freight continues to expand, we are not yet ready to turn outright bearish in our economic outlook for the U.S. domestic economy. (…) [but] the Cass Shipments Index has turned negative and is now signaling economic stagnation with the potential for contraction.
The Consumer Economy – We should also note that dry van trucking volume serves a similar role to container volume, as we have discussed in previous reports, in predicting retail sales. Especially when studied using the DAT Dry Van Barometer, a clear pattern of strong volume growth exceeding capacity growth, which is driving pricing power, remains. (…)
The Industrial Economy – (…) We would note that indications of accelerating strength have been coming from several modes of transportation, but none more visibly than in flatbed trucking which we view as a key heavy industrial indicator. As long as WTI crude oil stays above the marginal cost of production in the major U.S. fracking fields, we expect to see continued industrial economic growth. (…)
Data from the rail industry mirrors the data coming out of the flatbed segment of trucking. We have asserted for years that one of the best predictive indicators of U.S. domestic industrial activity is the chemical carload volume moved via railroad. Our assertion is simple: it is almost impossible to manufacture, or even assemble, anything in mass quantity without chemicals. As a result, there has historically been a very tight relationship between the railroad chemical carload volume and the ISM Manufacturing Index.
We should note, that after reaching strong volume increases (up 5.0% to 8.5% YoY in January and early February), the last few weeks have been slightly lower, although not severely enough or for a long-enough period of time to make a change in our forecast. However, we are closely watching for signs that the consequences of the absence of trade agreements and ongoing trade talks (which we assert are the primary cause for the slowdowns in international airfreight), are spreading to the U.S. industrial economy. We also know that chemical volume shipped by railroads has historically been one of the earliest and most reliable indicators on this matter. When viewed on a nominal basis, the chemical carload volume looks bullish for U.S. industrial production.
It so happens that the American Chemistry Council produces a Chemical Activity Barometer, “a leading economic indicator that helps anticipate peaks and troughs in the overall U.S. economy”.
The CAB is a composite index which is comprised of indicators drawn from a range of chemicals and sectors, including chlorine and other alkalies, pigments, plastic resins and other selected basic industrial chemicals. Chemistry’s early position in the supply chain gives the American Chemistry Council (ACC) the ability to identify emerging trends in the U.S. economy and specific sectors outside of, but closely linked to, the business of chemistry.
The CAB has weakened near contraction recently. Keep in mind that chemicals are produced before they get shipped so this indicator must lead Cass shipments data. For this reason, I would not bet the farm on Don Broughton’s conclusion above that “the chemical carload volume looks bullish for U.S. industrial production”.
February’s data on manufacturing production was out last Friday. The chart on the left is the YoY trend. On the right, MoM.
U.S. Seaborne Imports to Los Angeles, Long Beach Plunged in February Abrupt decline in inbound container volume at California’s big gateways came after shippers pulled forward purchases from Asia ahead of potential new tariffs
Loaded container imports into the ports of Los Angeles and Long Beach declined a combined 10.2% last month from the same month a year ago. The gateways in February handled 651,180 20-foot equivalent units, a common measure of container shipments, down nearly 75,000 fewer containers from February 2018. (…) The Port of Oakland also reported a 5% decline in imports in February from the year before. (…)
During the last three months of 2018, import volume at the ports of Los Angeles and Long Beach rose 9% over the same period a year earlier, and the growth continued in January, long after the holidays that typically trigger stronger shipping volumes in the fall. (…)
“Chinese New Year normally gives you a little dip, but it’s usually just a 5 or 6% drop-off from January to February,” said Mr. Kemmsies. Inbound volumes into Los Angeles fell 18.2% from January to February.
Combined exports at the Southern California ports also fell 13.9% in February from a year ago, including a 19.6% decline at the Port of Long Beach to the lowest level since January 2015. Oakland’s export volumes dropped 8.2% from a year ago in February.
Transportation stocks are not keeping pace:
A Recession Is Coming, And Maybe a Bear Market, Too (By A. Gary Shilling)
The recessionary indicators are numerous. Tighter monetary policy by the Federal Reserve that the central bank now worries it may have overdone. The near-inversion in the Treasury yield curve. The swoon in stocks at the end of last year. Weaker housing activity. Soft consumer spending. The tiny 20,000 increase in February payrolls, compared to the 223,000 monthly average gain last year. Then there are the effects of the deteriorating European economies and decelerating growth in China as well as President Donald Trump’s ongoing trade war with that country.
There is, of course, a small chance of a soft landing such as in the mid-1990s. At that time, the Fed ended its interest-rate hiking cycle and cut the federal funds rate with no ensuing recession. By my count, the other 12 times the central bank restricted credit in the post-World War II era, a recession resulted. (…)
At present, I don’t see any major economic or financial bubbles that are just begging to be pricked. The only possibilities are excess debt among U.S. nonfinancial corporations and the heavy borrowing in dollars by emerging-market economies in the face of a rising greenback. Housing never fully recovered from the subprime mortgage debacle. The financial sector is still deleveraging in the wake of the financial crisis. Consumer debt remains substantial but well off its 2008 peak in relation to household income.
Consequently, the recession I foresee will probably be accompanied by about an average drop in stock prices. The S&P 500 fell 19.6 percent from Oct. 3 to Dec. 24, but the recovery since has almost eliminated that loss. A normal recession-related decline of 21.2 percent – meeting the definition of a bear market – from that Oct. 3 top would take it to 2,305, down about 18 percent from Friday’s close, but not much below the Christmas Eve low of 2,351.
U.S. Home Builder Sentiment Remains Improved
The Composite Housing Market Index from the National Association of Home Builders-Wells Fargo held steady at 62 during March after increasing to that level in February. The index remained up from the December low of 56, but below the expansion high of 74 reached in December of 2017. (…) During the last ten years, there has been a 57% correlation between the y/y change in the home builders index and the y/y change in new plus existing home sales.
The performance of the three index components is mixed this month. The index of present sales conditions rose to 68, its highest level since October. The level of the index remained down, however, from its peak of 80 in December 2017. The index of expected conditions in the next six months improved to 71, also the highest level in five months. The recent peak in this index was 80 in February of last year.
Despite these gains, the index measuring traffic of prospective buyers declined to 44 from 48 in February and remained below the peak of 58 reached in December 2017.
The rise in the overall March index reflected mixed patterns amongst regions of the country. In the South, the index rose to 70, its highest level in five months. For the Northeast, the reading surged to 52 from its low of 36 in December. The index for the West improved slightly to 69, but has been moving sideways for several months. Working lower was the reading for the Midwest. Its fall to 49 matched its lowest level since May 2015. (…)
Proxy Indicators Suggest China Concerns May Be Overdone
(…) Bloomberg Economics says such concerns are overdone: Even taking account of seasonal factors, China’s start of 2019 credit growth looks strong. BE’s proxy indicators show growth broadly in line with the official data — 6.6 percent in the latest reading.