While economists and observers of trade flows have been debating contradictory data on the direction of the U.S. economy for several months, one measure has been unwavering. The Economic Cycle Research Institute’s index of Weekly Leading Indicators, a mixed aggregation of numbers that includes The Journal of Commerce-ECRI Industrial Price Index, has been progressing downward at an almost unrelenting pace since mid-April, a steady path that leads to an inevitable conclusion.
“The U.S. economy is indeed tipping into a new recession,” ECRI said in a notice to its clients. “And there’s nothing that policymakers can do to head it off.”
Driving the point home, ECRI Chief Operations Officer Lakshman Achuthan told CNN, “There’s no turning back. We are going to have a new recession.”
Achuthan is among the first economists to so definitively pronounce a recession imminent, if not already here, but others also are ratcheting down forecasts. Retailers and other importers remain cautious in the face of wobbly consumer confidence, and international ocean and air carriers expect no more than a modest peak season for holiday shipments.
FedEx CEO Fred Smith, whose company’s shipments are a barometer of economic activity, said in June he expected “the near-term softness in the economy will be temporary.” Now he’s less optimistic. “We expect sluggish economic growth will continue,” Smith told analysts last month.
How the slowing economy affects freight volume will become apparent during the next few weeks, when shipments normally spike in advance of the year-end holidays. Ocean carriers are anxious for a peak season that would trim losses that Alphaliner forecasts will total $300 million this year in the trans-Pacific alone.
The sluggish economy is bad news all around but has a silver lining for shippers: Weak demand is keeping carrier rates in check. Carriers were forced to delay peak season surcharges and have struggled to make them stick. Drewry Shipping Consultants’ weekly Hong Kong-Los Angeles spot index slid 17.9 percent from the start of August to Sept. 26, when it stood at $1,521 per 40-foot equivalent unit. The Shanghai Containerized Freight Index fell 11.9 percent from Aug. 19 to Sept. 30.
This year’s peak season is expected to be later and weaker than last year’s, when many shippers booked early to avoid possible shortages of containers and vessel space. Vessel space remains adequate this year, although carriers are belatedly trimming capacity in response to weak demand and low rates.
Journal of Commerce Economist Mario O. Moreno expects holiday season shipping this year to be tepid at best. He predicts U.S. containerized imports will rise only about 0.9 percent year-over-year in the third quarter and 1.1 percent in the fourth quarter as weak housing and jobs markets continue to depress consumer spending.
His forecast for eastbound trans-Pacific volume, which dominates retail imports, is even bleaker — a 2.4 percent drop in the third quarter and a rise of just 0.9 percent in the fourth. Eastbound trans-Pacific volume fell 3.8 percent in August after a 5.3 percent drop in July, PIERS data show. Total U.S. containerized imports in August dropped 1.5 percent after falling 5 percent in July.
The National Retail Federation and Hackett Associates still expect solid gains in fall import volume after a flat summer. Last month, their Global Port Tracker forecast imports at the 10 largest U.S. container ports would rise 11.8 percent in September, 9.5 percent in October, 8 percent in November and 4.5 percent in December.
Retailers cite improved inventory management for a delayed peak season. “This year, retailers have the luxury of importing holiday goods later than last year, which better ensures their inventory levels will accurately meet consumer demand,” said Jonathan Gold, the retail federation’s vice president for supply chain and customs policy.
But retail sales were flat in August and the latest Port Tracker report appears nearly alone in its optimistic outlook. Moreno agrees retailers and other importers are managing their inventories better, and that tight inventories could spur increased shipment volumes in the months ahead. But he said the economy continues to cast a cloud over shipping demand.
In September, Marino cut his forecast for full-year growth in containerized imports to 2.7 percent from the 4.7 percent he predicted last summer. “The outlook for imports for the rest of 2011 and going forward looks grim, as it isn’t clear how the economy will generate more private jobs,” he said.
The softening economy hasn’t surprised ECRI. In June, when many economists said the economy was in a temporary soft patch, Achuthan warned ECRI data pointed to a “pronounced, pervasive and persistent” growth slowdown that “is going to stick around for a couple of quarters, maybe more.”
ECRI’s Long Leading Index, which signals economic changes several months ahead, turned downward early this year. ECRI’s Weekly Leading Index, a gauge of shorter-term economic changes, fell to 121.9 on Sept. 23, its lowest reading in more than a year. The weekly index’s growth rate declined for the ninth straight week, falling to negative 7.2 percent.
One component of the Weekly Leading Index is the JOC-ECRI Industrial Price Index, which gauges industrial demand by measuring prices of 18 commodities, some of which aren’t traded on exchanges. The IPI has been on a steady decline since mid-April. It fell into negative territory in August and slid 8.5 percent in the last week of September.
Achuthan said the drop in ECRI’s indices point to a “vicious cycle” of an economic downturn. A recession happens when “sales disappoint, so production falls, so employment falls, so incomes fall, and then sales fall again,” he said in a Bloomberg interview.
That cycle seems to be spinning faster. Consumer spending through the second quarter rose at a meager 0.4 percent annual rate. U.S. manufacturing growth, one of the economy’s few bright spots, has slowed, and an index of China’s manufacturing activity has declined for three straight months. The U.S. unemployment rate remained at 9.1 percent in August, and personal income in August slipped 0.1 percent. Consumer spending inched up 0.2 percent in August but surveys show consumer confidence still at recession levels.
“Looking forward, consumer confidence will improve significantly once employment conditions improve, inflations start easing, wages improve and the equity markets stabilize,” said Chris G. Christopher Jr., senior principal economist at IHS Global Insight. “From the looks of things, it doesn’t seem all these things will happen anytime soon.”
Most analyses of the economy seem to circle back to housing, a market still trying to regain its footing after the bursting of a real estate bubble fueled by an excess of easy credit during the subprime-mortgage era.
Sales of new homes fell in August for the fourth straight month, declining 2.3 percent from July to a seasonally adjusted annual rate of 295,000. That’s about a quarter of the level at the housing bubble’s peak about five years ago, and well below the 750,000 level that’s considered healthy. Housing starts declined 5 percent in August.
“The troubles of the U.S. housing market, as reflected by lower home sales and falling home prices, continue to pound on U.S. import cargo,” Moreno said.
In addition to supporting builders and realtors, home construction and sales fuel containerized imports of goods such as furniture, appliances and housewares. Shipments of those commodities have slumped in tandem with housing.
Containerized imports of furniture, which comprise about one-tenth of containerized imports, fell 5 percent in August from a year earlier. Shipments of sheets, towels and blankets dropped 15 percent. Also declining were kitchenware, 7 percent; cooking appliances, 5 percent; and lamps, 2 percent.
Declines in other cargo categories during August were exaggerated by comparisons with unusually strong volumes during last year’s early peak season. Women’s and infant apparel shipments fell 11 percent. Menswear was down 5 percent. Toy imports fell 6 percent.
Auto parts shipments rose 23 percent in August as supply chains continued to recover from the Japan earthquake’s disruption. Growth in auto shipments is expected to slow as production returns to more normal patterns.
Manufacturing has remained healthy in comparison with other key economic sectors, but factory production is beginning to feel the strain of a softening economy.
The Institute for Supply Management’s manufacturing index surprised many analysts by growing 1 percentage point in September. But the reading of 51.6 percent was still close to the point of contraction, and inventories remain at relatively high levels.
U.S. factory orders for durable goods have shown mixed results. Durable goods orders decreased 0.1 percent in August, but core capital goods orders, excluding defense and aircraft, rose 1.1 percent. Cliff Waldman, economist at the Manufacturers Alliance/MAPI, said the Commerce Department report “reflects the mix of uncertainties in the U.S. and global economic climates” and “shows that manufacturing activity is clearly moderating as global economic growth slows.”
Waldman said manufacturers relied on inventory accumulation and export growth to buck the trend of a slowing economy earlier this year. “But as the inventory swing abates and as global growth slows, the factory sector is facing much the same risks as the rest of the economy.”