A little while back, in this space, I wrote a blog with the following headline: “Is it time to be (a little) concerned about the economy?” Many of the points in that blog described various economic factors that remain the same, but what appears to be different now are other things on the economic radar.
As for things that are essentially the same, that includes things like still historically low unemployment levels and decent consumer confidence, with the latter, as I said before, is viewed by many economists as a “fluid” metric,” while also serving as a clear driver of optimism. That premise is also helped by pretty solid retail sales, too, at the halfway pole of 2019.
But because those things have remained consistent, that does not mean all is well in the economy. And there are more than a few reasons for that to go around, to be sure.
One example of that is manufacturing output. Even though the Institute for Supply Management’s (ISM) benchmark for manufacturing, the PMI, remains above 50 (a reading at 50 or higher indicates growth is occurring), it has been trending down in recent months. What’s more, a key indicator of manufacturing growth, new orders, which are commonly referred to as the engine that drives manufacturing, are now in the low 50’s range, with a 1% increase in May that was preceded by a 5.7% April decline. While these numbers show growth, it is coming at a reduced rate, which is a concern among supply chain stakeholders. Another concern relating to ISM data is production, with May’s 51.3 reading serving as the lowest production reading since August 2016’s 49.6.
Another economic concern continues to be the trade tension brought on by the ongoing trade war between the United States-China.
With such a stop-and-start feel to this situation, one thing that has remained very clear is that this is challenging for shippers, with no clear signs of any type of a clear resolution, at least not yet anyhow. The changing tariff outlook, depending on the day or Tweet, has created unrest among global and domestic shippers. That much is clear.
That unrest has come in the form of supply chain uncertainty, forcing companies to definitively act on, or at least strongly consider, moving manufacturing operations out of China to another country, to rid themselves of tariff-related headaches and increased expenses brought on by tariffs.
An article in The Wall Street Journal this week clearly presented the travails of shippers dealing with the U.S.-China trade war with this headline: “Manufacturers Move Supply Chains Out of China.”
That is as on point as it gets, with the article describing the myriad challenges U.S. manufacturers are up against in China, with manufacturers moving production out of China, due to the trade and tariff tension.
Not to be overlooked in assessing the overall economic outlook is the always excellent Cass Freight Index Report from Cass Information Systems and authored by Broughton Capital Founder Donald Broughton.
In the June report, which was issued this week, the biggest takeaway may be that freight shipments declined for the seventh consecutive month. Even with aforementioned things like low unemployment and solid consumer confidence levels, this data point is pretty hard to overlook.
Broughton pulled no punches in describing the shipment decline, saying: “With the -5.3% drop in June following the -6.0% drop in May, we repeat our message from last month: the shipments index has gone from ‘warning of a potential slowdown’ to signaling an economic contraction. We acknowledge that: all of these negative percentages are against extremely tough comparisons; and the Cass Shipments Index has gone negative without being followed by a negative GDP.”
The shipment declines addressed by Broughton also matches up well with the most recent batch of import data from the Port of Los Angeles and the Port of Long Beach down a combined 5.1% in June, which does not sync up well with strong consumer confidence readings but speaks clearly to tariffs implemented in early May, with the White House raising list 3 tariffs to 25% from 10%, which crimped inbound volumes.
Another key indicator of economic health is the always-interesting takeaways coming from freight transportation and logistics services providers earnings reports. While second quarter earnings are still in the early innings, with only a few companies having reported, many previews heading into earnings season used words like “cautious” or “muted” to describe what is on tap for earnings announcements.
We also need to remember that the annual comparisons for this round of earnings results is an uphill climb, given how strong of year 2018 was for the freight economy.
In describing the economy on his company’s earnings call, CSX President and CEO Jim Foote aptly put things into perspective.
“Both global and U.S. economic conditions had been unusual this year to say the least and have impacted our volumes,” he said. “You see it every week in our reported carloads. The present economic backdrop is one of the most puzzling I have experienced in my career.”
Puzzling is a great way to describe the current economic landscape. With some good things going on and some not so good things going on, the current economic scenario can be viewed as mixed or muddled, for sure. Are we at a point where things have bottomed out? The consensus would likely be no, at least not yet. But without some clarity on things like trade, among others, things need to play out some more. Interesting times indeed.