The industrial commodities sector that fuels factory production is sending worrisome signs to a global shipping business concerned with whether the economy is passing through a proverbial soft patch or heading toward something worse.
Amid a range of conflicting economic indicators that sent expectations on a roller-coaster ride in the year’s second quarter, the Industrial Price Index produced by the Economic Cycle Research Institute and The Journal of Commerce took a clear turn downward in recent weeks, signaling the industrial sector is cooling off heading into the summer.
The trend runs counter to comments from many analysts who say the U.S. economy is merely taking a breather in a long, choppy recovery from the worst recession in decades, and that growth will accelerate later this year and produce a solid increase in shipping volume.
Lakshman Achuthan, co-founder and managing director of the New York-based Economic Cycle Research Institute, says ECRI data point to a “pronounced, pervasive and persistent” growth slowdown that “is going to stick around for a couple of quarters, maybe more.
“I’m afraid it’s not a soft patch. It’s not something that’s a one- or two-month affair,” he said in a recent CBS interview. “The global industrial sector, which had been running pretty hot, has started to cool off.”
Achuthan said the negative turn was signaled early this year by ECRI’s Long Leading Index and confirmed by other ECRI data, including the firm’s Weekly Leading Index. The weekly index includes data from the JOC-ECRI Industrial Price Index.
Over the years, the Industrial Price Index has proved a reliable gauge of inflation in a broad range of industrial materials. The IPI tracks 18 commodities, some of which aren’t traded on exchanges. A rise in their prices indicates rising demand, and vice versa.
ECRI data over recent weeks indicate slower growth in the coming months. On June 24, ECRI’s Weekly Leading Index and its annualized growth rate reached their lowest point since December, an indication the economy is entering a downward cycle.
Achuthan’s outlook is at odds with those of most analysts, who expect economic growth to accelerate in the second half of this year.
The median forecast of 67 economists polled by Bloomberg News last month called for U.S. GDP to rise 3.2 percent in the second half of the year. IHS Global Insight expects GDP to grow 3.5 percent in the second half, a sharp increase from the revised 1.9 percent growth the government reported for the first quarter and 2 percent projected in the second quarter.
FedEx, whose shipments are a barometer of economic activity, forecasts GDP to rise from 1.9 percent in the second quarter to 3.5 percent in the third and 3.4 percent in the fourth, for a total increase of 2.5 percent for 2011. FedEx expects GDP to rise 3 percent in 2012.
“The near-term softness in the economy will be temporary,” FedEx CEO Fred Smith told analysts in a conference call last month. “Going forward, we see stronger economic growth.” He cited falling oil prices, Japan’s earthquake recovery effort and tight inventories, and said industrial demand will lead recovery.
“Unlike most economic forecasters, FedEx is actually talking to hundreds of thousands of customers,” Smith said. “This is information that’s infantry-based. It’s not 50,000 feet; it’s based on what the folks that provide our volume are telling us.”
Journal of Commerce Economist Mario O. Moreno expects import-export growth to rise during the next two quarters, but at a slower rate than in the year’s first half. He lowered his forecast for full-year growth in U.S. containerized imports to 4.7 percent from 6.7 percent earlier this year, citing weak jobs and housing markets.
Government statistics indicate personal spending remains tepid, with consumers squeezed by high gasoline prices, an unemployment rate that topped 9.1 percent last month and near-stagnant personal income.
“Persistent high unemployment, a weak housing market, high fuel prices and inflation all put pressure on consumers,” Walgreen CEO Greg Wasson said in a June 21 earnings call. He echoed other retail executives in saying customers have trimmed discretionary spending and are focused on essential purchases.
Consumer cutbacks are affecting containerized imports, which totaled 1.5 million 20-foot-equivalent units in May. Year-over-year growth slowed to 6 percent in May from 9 percent in April, according to PIERS, a Journal of Commerce sister company. Perhaps more important for the immediate future, some commodities that are the foundation of peak-season shipping were decidedly weak in May.
The housing slump has cut into sales of furniture, which generates more than 10 percent of containerized imports. Furniture imports in May fell 2 percent, to 153,343 TEUs. And reduced discretionary spending is showing up in reduced imports of numerous categories of goods. Toy imports fell 9 percent in May, the fourth consecutive year-over-year decline. Imports of sheets, towels and blankets dropped 17 percent.
Containerized exports, meanwhile, are thriving. Moreno expects them to rise 10 percent this year, aided by a weak dollar and reviving overseas demand led by developing nations.
Export growth has helped make manufacturing a bright spot in the recovery. The Institute for Supply Management’s factory index weakened to 53.5 in May from 60.4 in April, but remained in positive territory for its 22nd consecutive month before last Friday’s release of data for June.
New orders for durable goods rose 1.9 percent in May after dropping 2.7 percent in April, the Commerce Department reported. Excluding transportation, a category often skewed by large orders for aircraft, durable goods orders rose 0.6 percent.
“All told, these data square with other reports that show moderating manufacturing activity amid disconcerting weakness in the U.S. economy,” said Cliff Waldman economist at the Manufacturers Alliance/MAPI. “The factory sector will continue to grow faster than the U.S. economy as a whole. Manufacturing, however, cannot escape the risks born of a troubled U.S. rebound and a world full of slowdowns and crises.”
Surface transportation statistics offer a mixed picture of current demand.
The Association of American Railroads reported year-over-year increases in carload shipments of commodities used in manufacturing and construction. Sixteen of 20 carload commodity groups posted year-over-year increases.
But carload volume for industrial commodities generally has been flat or falling in many of the key sectors. Chemical shipments carried by North American Class I railroads were at some of the lowest levels of the year in the first three weeks of June, the AAR reported, while metals and metal ores have been relatively flat.
The American Trucking Associations’ for-hire truck tonnage index rose only 2.7 percent in May, its lowest increase since February 2010. “Truck tonnage over the last four months shows that the economy definitely hit a soft patch this spring,” ATA Chief Economist Bob Costello said.
Costello blamed some of the drop on higher fuel prices and supply chain disruptions following the Japan earthquake. “I believe this is a soft patch and not a slide back into recession, and we should see better, but not great, economic activity in the months ahead,” he said.
Nariman Behravesh, chief economist at IHS Global Insight, sees “signs of hope” in the second half. He noted commodity price increases have eased, especially for oil, which was down even before the June 23 release of strategic reserves, and the automotive industry is recovering from supply constraints following the Japan earthquake in March.
“If the recent correction in commodity prices holds, growth should improve in the second half — assuming that the euro zone sovereign debt crisis does not explode into a global financial crisis, and assuming that brinkmanship over the federal debt ceiling does not produce a wholly avoidable accident at home,” Behravesh said.
ECRI’s Achuthan still isn’t ready to declare recovery is at hand. “I can’t predict that there’s a revival yet because our leading indicators on global industrial growth and the U.S. economy haven’t turned back up yet,” he said. “So I think we need to be prepared for slowing to continue through this year. That’s not a soft patch.”