Please consider the Economic Outlook from Freight’s Perspective.
Cass’ Growing Concerns
- When the December 2018 Cass Shipments Index was negative for the first time in 24 months, we dismissed the decline as reflective of a tough comparison. When January 2019 was also negative, we again made rationalizations. Then February was down -2.1% and we said, “While we are still not ready to turn completely negative in our outlook, we do think it is prudent to become more alert to each additional incoming data point on freight flow volume, and are more cautious today than we have been since we began predicting the recovery of the U.S. industrial economy and the rebirth of the U.S. consumer economy in the third quarter of 2016.”
- When March was down -1.0%, we warned that we were preparing to ‘change tack’ in our economic outlook.
- With April down -3.2%, we see material and growing downside risk to the economic outlook. We acknowledge that: all of these still relatively small negative percentages are against extremely tough comparisons; the two-year stacked increase was 6.6% for April; and the Cass Shipments Index has gone negative before without being followed by a negative GDP. We also submit that at a minimum, business expansion plans should be moderated or have contingency plans for economic contraction included.
- The initial Q1 ’19 GDP report of 3.2% suggests the economy is growing faster than is reflected in the Cass Shipments Index. Our devolvement of GDP explains why the apparent disconnect is not as significant as it first appears.
- The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, heightens our concerns about the economy and the risk of ongoing trade policy disputes.
European Airfreight vs Eurozone PMI
European airfreight volumes were negative since March 2018, but only by a small singledigit margins (-1% to -3%), until November 2018. Unfortunately, since then, volumes have started to further deteriorate. Our European Airfreight Index was down -6.8% in February and -1.5% in March.
Asia Pacific Airfreight
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 – 5.4%, February -13.3%, March -3.3%). If the overall volume wasn’t distressing enough, the 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.
Shanghai Airfreight
The data underlying economic history is clear: the more unrestricted and robust global trade is, the more prosperous the global population becomes. Open markets of free trade are the greatest method to efficiently allocate resources and ensure that the best quality goods made by the most efficient producers are available to everyone. Unrestricted global trade lifts hundreds of millions, even billions, of the world’s population out of poverty. ‘Protectionism,’ like so many government regulations and programs, frequently produces results that are the exact opposite of the intended outcome.
Whether it is a result of contagion or trade disputes, there is growing evidence from freight flows that the economy is materially slowing. Our confidence in this outlook is emboldened by the knowledge that since the end of World War II (the period for which we have reliable data) there has never been an economic contraction without there first being a contraction in freight flows. Conversely, during the same period, there has never been an economic expansion without there first being an expansion in freight flows.
Welcome Views on Free Trade
It is extremely refreshing to see an article discussing free trade that gets a 100% Mish approval.
To the excellent Cass synopsis, it’s important to add that when free trade stops, wars frequently start. Moreover, the result is never any good whether wars start or not.
The Great Depression is the classic example of the collapse in trade.
Although the Smoot-Hawley Tariff Act did not cause the “Great Depression” it did help turn a depression into the “Great Depression”.
Prior to the Great Depression, the term recession did not exist. Thus, when you hear talk of the Fed saving the day preventing another depression, it’s total nonsense.
All the recessions following the Great Depression would have been labeled depressions before 1929.
Global Recession
There is no official definition of a “global recession”. Some define the term as under 2% growth. Others say under 3.0%. I am willing to split the difference.
The US recession may not have started yet, but a global recession (under 2.5% growth), likely has.
Mike “Mish” Shedlock
To much QE and government spending, consumers might seem spent out or tapped out, but are seemingly flush. I’m wondering if a soft landing event occurring this go around as we come to terms or adjust to government spending being such a strong backstop to hard times.
“Unrestricted global trade lifts hundreds of millions, even billions, of the world’s population out of poverty. ‘Protectionism,’ like so many government regulations and programs, frequently produces results that are the exact opposite of the intended outcome.”
Everyone has self interests, however. There isn’t free trade, there are trade deals.
De-industrialzing the U.S. has had negative consequences for a number of Americans, regardless that it has been a benefit for those working at the Port of Long Beach or living in China.
FREE trade without FAIR rules, favors those with mobile CAPITAL, in any Country, exploiting prevailing global LABOR arbitrage, any where in the world!
Besides ‘FREE” trade can be ‘defeated’ or subverted by Govt subsidies to select industries, Currency devaluation and of course by LOWERING the price of CAPITAL like QEs, ZRP and NIRP!
In the end CAPITAL comes out the ‘winner’ and the Labor (wage worker) loser! Automation will make this WORSE, every where!
Unrestricted free trade favors globalists( mult-Nationals, top 1-5% and the wall st) with mobile CAPITAL to invest any where and further ‘exploit’ the prevailing global labor arbitrage for profit, at a cost to average American WAGE workers. Whether right or wrong, fair or otherwise, American wage workers, just cannot complete with 3rd world labor wages, prevailing out side the USA, if they want to keep their current standard of living!
Winner – Capital (wall St, Multi-Nationals) Loser – Labor( Wage workers) in America! More increase in WEALTH and income inequality, which already happened since globalization (1999). As an investor, it is for me for NOT, average Joe/Jane wage workers of America! THINK!
The ones who will get hit hardest in a trade war are those at the bottom. As the the economy spirals down, and jobs vanish, even as prices rise on imported goods, the unemployment rate will rise dramatically, and the standard of living will be hit hard. Did those at the bottom do well in the years following the adoption of the Smoot-Hawley Tariff? If not, why repeat it, expecting something different?
“All the recessions following the Great Depression would have been labeled depressions before 1929.”
I would guess that is why they used the word recession to describe depressions after the Great One.
50 bps rate cut is coming. S&P 3500 is coming. Dow 30k is coming. Only way to prevent deflation is to inflate assets.
This means you cant lose money on stocks or bonds in the aggregate. The party is just getting started but it will be a quick exit by the big money after a big ride up. Dow 36k isnt out of reach if the rate cuts continue.
A 50bp rate cut will not inflate assets to the levels you quote. They are already grossly over-valued and profits margins have peaked. It will need money creation on a grand scale to get them there.
“Only way to prevent deflation is to inflate assets.”
No, inflating assets won’t feed into CPI — not effectively anyway. Try MMT or UBI. Banks need inflated asset prices to remain solvent while debtors need high inflation to reduce their true debt burdens.
Excellent article, Mish. I rarely agree 100% with any of your articles, but this one I do. I particularly agree that the Smoot-Hawley Tariff didn’t cause the great depression, rather it turned a depression into the great depression.
People underestimate the strength of the economy, though. It tends to muddle along on it’s own. It takes something major, like a trade war, to knock it off course, and even that takes awhile to start producing an impact big enough to see. We are only now beginning to see the impact, but as time passes, the impact will become larger as the economy takes a different (lower) trajectory.
Unrestricted trades, good for those with mobile CAPITAL invest any where in the world, exploiting the global arbitrage
. NOT for the average wage workers of America ( bottom 80-90%)
winner – Capital. Loser – Average wage workers of America!
See my detailed comment below!
The data underlying economic history is clear: the more unrestricted and robust global trade is, the more prosperous the global population becomes.
Corollary: the more restricted and limited global trade is, the more prosperous the US population becomes.
The great depression was a weather event. Oklahoma dust storms are legendary. Midwest corn did not grow over six inches high for five years.
Good for those with mobile CAPITAL invest any where in the world, exploiting the global arbitrage. NOT for the average wage workers of America ( bottom 80-90%)
See my detailed comment below!
AS a long time investor, retired professional with fairly good amount of CAPITAL invested over the years ( investor since ’82) ‘unrestricted trade’ sounds GREAT! But is good for average American wage workers?
Have you really talked to such person? Average Joe/Jane on the Main st?
Automation will make this condition worse!
Depends upon which side of your bread slice is buttered!?
The problem with global trade is that for the most part it means ‘Sell to the USA’. I will travel to my home country soon where I will take a GPS that is 1/2 the price that my friend would pay there. Family that visits from Europe bring an extra bag for all the stuff that they will buy here to take back. Free trade for foreigners means that they get to trade to the US, not really the other way around.
This is proof positive that a global deflationary collapse is well underway. Most people have no idea what deflation really is or does to an economy or the people caught up in it. I do and it isn’t pretty or fun.
Especially when accompanied by high debt burdens that grind upwards as deflation takes hold.
The Fed has become adept at preventing deflation, and they will drop money from helicopters, if needed. The problem is that deflation itself isn’t the problem, it’s a symptom. If you have pertussis, and they treat your cough, that will make you not cough, but it won’t cure you.
Deflation is part of the inventory cycle, and is as natural and wholesome as an autumn leaf fall.
Let’s see what happens after 50bps cut.