California Mega-Port volumes are negative thus far this year, the longest stretch since the Industrial and Great Recessions; echoing the weakness, Cass Freight Shipment Volumes are down 4.5% versus last year
While the Bloomberg consensus calls for a modest export expansion in the third and fourth quarters of this year, freight volumes suggest otherwise; in August, ISM and IHS Markit export indices fell to levels not seen since 2009, corroborating the freight data
U.S. trade contracting by year-end is increasingly likely; the GM strike will exacerbate the pressure on transportation as the fallout pushes down the supply chain
We’d venture that the first thing that comes to mind when you hear “ghost ship” is the “Flying Dutchman,” the phantasmal ship that can never make port, doomed to sail the seas forever. But not all ghost ships are products of fiction. Real-life derelicts sprinkle history’s annals. One famous example was the Mary Celeste, an American merchant brigantine, discovered off the Azores Islands in the Atlantic on December 5, 1872, adrift and crewless. The Canadian brigantine Dei Gratia happened upon the abandoned and disheveled, but seaworthy ship, still under partial sail, and with her lifeboat missing. The Mary Celeste had departed New York City for Genoa, Italy on November 7. With her last log entry dated ten days before her discovery, she was still amply provisioned, her cargo of denatured alcohol intact, and the captain’s and crew’s personal belongings undisturbed. None of those who had been on board were ever seen or heard from again.
Today’s massive freighters are amply crewed and anything but ghostly, unless you count the missing cargo in their holds. Over this past weekend, one of QI’s Twitter followers generously shared a picture of such a rarely seen image – a container ship not loaded to capacity pulling into the Port of Los Angeles. It’s the middle of September, time to stock up for the holidays. And we’re seeing a drop-off in import volumes hitting U.S. shores?
This got us thinking about the monthly California Mega-Port container data from Los Angeles, Long Beach and Oakland that we have shared with you in the past. We don’t yet have September volumes on hand. We have to wait until the middle of October for that data to be released. August, however, speaks to a theme of contracting trade unfolding.
Thankfully, the California Mega-Ports release granular figures on both loaded and empty containers. Common sense says to focus on the former because loaded containers ferry goods and empty containers do not (duh). Examining the sum of those heading outbound and those coming inbound – exports plus imports – yields a proxy for total trade.
The red line above depicts this series, which has declined on a year-over-year basis every quarter this year, including the third quarter-to-date’s 0.3% drop. Recent parallel losing streaks were last seen in the 2015-16 Industrial Recession and the Great Recession. (The 2001 Recession included just one year-over-year contraction.)
Cass Freight Shipment Volumes – the blue line – gauge broader trade flows and echo the weakness in port traffic. What differentiates Cass is that it covers other modes of transportation beyond water via air, rail and truck. At -4.5% vs. last year, thus far in the third quarter, Cass is sending a relatively weaker signal.
For completeness, we included total U.S. trade (green line above), the ‘X’ and ‘M’ in net exports, but summed these Econ 101 metrics instead of taking the difference. Goods either come in or go out of the country. Freight flows don’t distinguish between the two, they include both. Through this year’s second quarter, total U.S. trade has decelerated to a 0.8% rate compared to 2018’s second quarter rate, the slowest expansion in three years.
Further validating the multiplying number of trends, export indices from both the Institute for Supply Management (ISM) and IHS Markit downshifted sharply in August to levels last seen in 2009. With this reality hiding in plain sight, you would think consensus expectations for exports would be equally bearish. Rather, the Bloomberg consensus of economists is calling for modest export expansion of 1.3% and 1.9%, quarter-over-quarter annualized, in 2019’s third and fourth quarters, respectively. Yes…we’re shaking our heads with you.
We concur with Cass which sees, “a growing risk that GDP will go negative by year’s end.” And we were there before GM’s unionized army of workers went on strike. We’ve already heard rumbles of layoffs spreading along the North American supply chain in response to planned production cuts that promised to deepen. A cynic might have chuckled at the headlines designed to shock of GM losing $50-100 million a day in profits for every day the strike lasts. With inventories continuing to rise, which we’ll cover in depth in next week’s Quill, GM will initially benefit from the forced idling of its production lines.
In the meantime, freight volumes will be depressed further as the strike takes hold and pushes down through to GM’s suppliers. That means there will be more negative prints to come from Cass, which reckons it takes two to three quarters for depressed freight to be reflected in broader economic data. It’s no optical illusion – the risk of an outright contraction in U.S. trade is squarely in our sights. We suggest that you be on the lookout for a growing number of ghost ships crossing the Pacific.