Headline items for 2020
Retail sector – Consumers single-handedly carried the economy throughout the majority of 2019, and much will be the same throughout the first half of 2020. Consumer confidence remains elevated and conditions for them are stable. This is good news for those exposed to consumer-facing markets. Consumer activity isn’t expected to slow or contract in the second half of 2020. Still, some help should be coming from other segments of the economy as well, namely manufacturing and business investments.
Housing and construction – Housing and construction struggled to gain traction throughout 2019. However, this was not due to a lack of demand. Demand for homes was high throughout 2019 and will remain strong going into 2020. There were supply-side limitations that hindered the amount of activity within the industry. These issues range from lot/land availability and availability of skilled labor to inventories and prices. These same issues will be present in 2020, but momentum is building. More projects breaking ground is good news for flatbed trailers. Additionally, more home purchases lead to those homes being filled with new furniture and appliances. All of these play into freight volumes.
Labor – The labor side of the economy is the underpinning of robust consumer trends as of late. Unemployment rates hit historic lows of 3.5%, and wages remain strong enough to support personal consumption expenditures. Unemployment levels will likely not surpass 4%, barring any black swan events that would shake up domestic growth, and as of now, no significant catalysts are building. These conditions will keep consumers making purchases, which will drive freight activity throughout the year.
Industrial – The manufacturing segment waned throughout 2019 and will have a slow start in 2020. Business investment slowed, and trade tensions frequently caused increased uncertainty. The Institute for Supply Management’s Purchasing Managers’ Index contracted through nearly the entire second half of 2019. The downward momentum will spill into 2020 as new orders for the industry struggle as well. There will be limited opportunities here.
Conversely, nondefense capital goods new orders are showing early signs of reversal. This suggests that business-to-business activity may increase in the coming months, likely during the second quarter. A boost here will take some pressure off of consumers and add to flatbed and dry van volumes.
International trade – Trade tensions are the biggest concern for manufacturers and businesses that operate on an international scale. Consumer products seem to be the ace in the hole. It’s the major bargaining chip that will be leveraged to move things along, as needed. A hit here would undoubtedly be detrimental to all parties involved. Hefty additional tariffs on consumer products will be the most significant risk facing growth in 2020. However, this seems less likely after progress with a phase one deal with China. Trade tensions will likely escalate and die down as they did through much of 2019, but some slow progress should be made, with consumer goods being the breaking point. If there is no notable progress in the coming months, manufacturers and businesses will likely find workarounds to meet requirements. This can be in the form of expanding operations in countries in Southeast Asia, near-sourcing to Mexico or finding strategic loopholes to maintain business processes in China. Whatever form it may take, overall momentum will be sluggish during the first quarter. If it starts hitting the consumer, become concerned.
The landscape
It seems as though uncertainty became the theme throughout 2019. This stemmed from the shifting tides of the tariff war between the U.S. and China. Updates from President Trump’s Twitter account regarding sentiment toward a deal coming through often dominated headlines. The trade tensions impacted business decisions nationwide and echoed throughout the world, hitting many European industrial-based economies in the process. The uncertainty took away from freight volumes as manufacturing steadily declined throughout the year.
However, 2019 was up against steep comparisons as 2018 was a red-hot year, not only for manufacturing but for freight activity as well. Nonetheless, the Institute for Supply Management’s Purchasing Managers Index is in the fourth consecutive month of levels below 50. The levels are signaling contraction within the manufacturing industry. Further, the new-orders components of the index registered a 47.2 in the most recent month. This is telling for manufacturing as a whole going into the new year. The reduction in manufacturing translates to looser capacity and lower tender rejection rates for carriers that typically haul these goods. The current rise in outbound tender rejections have less to do with any rise from the industrial sector than with peak retail season and tight driver capacity during the holidays.
The most recent status for trade relations proved promising going into 2020, with a phase one deal in place. This is going to be a relief for those in the agricultural segment, and consumer-facing businesses are dodging a hefty duty that could have impacted prices in the retail sector in a meaningful way.
The macroeconomy is expected to ease going into 2020 and throughout the first quarter, with the rate of growth moderating through, but not contracting. Consumer activity supported much of the growth throughout the 2019 calendar year. Conversely, the manufacturing segment waned throughout the same period.
Consumer strength
Personal consumption expenditures are one of the most significant components of the U.S. economy and will likely remain stable overall in the pace of growth going into early 2020. Though there may be some mild easing, core personal consumption expenditures should end the fourth quarter around 1.7% above the year-ago level. The rate of growth will modulate throughout the first quarter of 2020, nearing 2% on a year-over-year basis. Personal consumption of goods should remain near 3% above the year-ago levels for the first quarter of 2020. This is a slight easing for the goods side, which is pertinent to freight movements, but it should remain positive on a quarterly basis. Of course, this is barring any black swan events on the trade front.
As it stands now, year-over-year growth in disposable income (RPDIMG.USA) is moving upward after moderating through much of 2019. The more disposable income consumers have, the more goods they purchase, and this could mean tighter driver capacity as these goods make their way across the country (OTRI.USA).
Additionally, consumer confidence plays a role in purchasing tendencies. When consumers are feeling more confident, they are more likely to leverage credit when disposable income is lacking. Some might see this as a positive from a pure contribution to the gross domestic product, but it’s essential to be mindful of consumers overextending themselves. Delinquency rates (DRCC.USA) were generally flat in 2019. Levels are slowly rising but still far off from pre-’08 recession levels. It’s not a threat now but should be monitored throughout 2020.
The durable goods portion of personal consumption expenditures (PCEY.DG) should remain stable going into the first quarter of 2020, staying above year-ago levels. The nondurables component also will maintain positive growth trends on a quarterly basis, modulating near the 3% range on a year-over-year basis. The partial trade deal will alleviate some concerns of price increases hitting consumer-facing goods, which would likely limit expenditures and hinder economic growth going into the new year. The growth will be dependent both on consumer confidence and employment conditions. Sentiment remained generally elevated in the face of volatile headlines throughout the year, showing some resilience. The stable conditions for consumers also will contribute to freight volumes (OTVI.USA) as these goods are hauled throughout the country.
Unemployment levels hit record lows throughout 2019, and rates should remain below 4% through the first quarter of 2020. Gross domestic product is expected to decline slightly for the fourth quarter but should stay positive, nearing levels of 1.5%.
The laggard
As mentioned earlier, the manufacturing segment will not fare as well as the consumer segment of the economy. Total industrial production (IPROG.USA) will likely eke out a slight gain in 2019 compared to 2018 as a whole, but year-over-year growth rates are declining steadily. The fourth quarter of 2019 will likely be over 1% behind the same quarter in 2018. The deceleration will likely persist into 2020, with a trough in quarterly trends in March. The manufacturing component makes up nearly 70% of the overall industrial production index (IPROG.MFTG) and will be the primary source of contraction for the measure.
Quarterly trends for the manufacturing component of industrial production are already negative, and levels will likely come close to a negative 2% through the first three months of the year. The downward movement for manufacturing means fewer opportunities for dry van, flatbed and less-than-truckload. The most recent uptick for industrial production is tied to the General Motors strike coming to an end. The ramp-up in output boosted the index for the month but cannot be expected to perform at the same capacity to prop up manufacturing going into 2020.
Although much of manufacturing is expected to be rather weak in the first three months of the year, production is expected to pick up by March. Business-to-business activity is starting to build some momentum late in 2019 and should support some rise for the manufacturing segment by the second quarter. Further, the rise in nondefense capital goods new orders, excluding aircraft (ORDR.NDCGXA), signals that there will be support for more business investment going into the first quarter than in much of 2019.
Moving forward
The consumer is key. Businesses across all segments should approach the first half of 2020 with caution. Slower growth is expected, but that does not mean contraction or recession. It means it’s advisable to plan for reduced activity and approach opportunities strategically. That may mean using competitive pricing to capture market share or even preparing for the stronger second half of 2020. There will be uncertainty that no one will be able to accurately foresee coming from the ever-changing trade front. However, there is reason to be optimistic. Consumer conditions remain favorable, business-to-business activity is showing some signs of life, and most of all, you have FreightWaves SONAR to help you navigate what’s likely to be a sluggish first half of the year.
