Growing up in the Midwest, you learn which cloud formations lead to slow and steady rain, and which often lead to more severe weather. Looking back at economic activity at the first half of 2019, we may be looking at the latter.
Many analysts have been quick to dismiss weak tonnage/transport/consumer data because of a variety of oddities (the Polar Vortex, the unusually long winter, flooding, the late Easter, late tax returns, an inventory build ahead of tariff concerns, goods being stuck on the West Coast because of rail service issues, etc.). However, regardless of how we got here, the mid-year scorecard says the consumer has not lived up to expectations, with higher inventory levels, decreasing visibility on trade, and a slowing industrial marketplace.
This last point is of increasingly greater concern. I’ve previously highlighted the importance of corporate profits and industrial production as key leading indicators of economic activity, and that both can be reasonably forecast by looking at adjusted rail carload and truck tonnage figures.
Our adjusted rail carload figure (total rail traffic, less coal and grain) has declined successively from -1% in February to -2% in March, to -3.3%, -5%, and -5.8% in April, May and June, respectively. Truck tonnage has been weaker than hoped for all quarter, while we have watched the growth rate of business inventories increase from 4% to 5%. Freight volumes are under-growing GDP by about four percentage points, yet we are failing to make any dent in inventory accumulation. This leads me to believe we will continue to see freight volumes undergrow economic activity for the next six months. We need to bring inventory growth rates more in line with actual economic growth, now estimated in the 1.5% to 2% range for the second half of 2019. These lower growth rates will likely be factored into expectations in second-quarter earnings reports.
The larger issue is that rail data leads … and it’s currently near -6% and falling. The weakness has broadened from five to 11 of the 13 commodity groups we are tracking. This implies negative industrial production growth late this year, and if corporate profits slow, as history would predict, potentially a “profits recession,” where hiring will slow, capital additions will be delayed, and unemployment will rise, leading to a further slowdown in consumer spending. Entering 2020, if we do not succeed in bringing down inventory growth rates, we could be looking at a soft landing (also called a “rolling recession”) or worse.
Perhaps I’m reading the gathering storm clouds on the horizon incorrectly, and a China trade deal, combined with lower interest rates, could energize the consumer and disperse the clouds. But as we watch the freight economy weaken with every successive month and inventory continue to grow, the skies are darkening. The big storm is still a ways out, but make sure the rain gear is nearby.
Jeff Kauffman is contributing economic analyst for HDT. He has been a recognized trucking and transportation authority for almost 30 years, most notably heading freight transportation research forMerrill Lynch, and today runs transportation consulting firm Tahoe Ventures. He can be reached at firstname.lastname@example.org.