Tuesday, June 19, 2018

The US keeps on truckin'

Truck tonnage continues to post significant gains, according to the American Trucking Association's latest release. Tonnage is up 7.8% year over year, and it is up at an annualized rate of 7.8% year to date.

Chart #1

Chart #1 is an updated version of the one in my post last month, "Truck tonnage evidence of a Trump Bump." As it suggests, there is a strong correlation between truck tonnage—a good proxy for the physical size of the economy—and equity prices.

From the ATA's latest release, including some relevant facts:
“This continues to be one of the best, if not the best, truck freight markets we have ever seen,” said ATA Chief Economist Bob Costello. “May’s increases, both sequentially and year-over-year, not only exhibit a robust freight market, but what is likely to be a very strong GDP reading for the second quarter.

Trucking serves as a barometer of the U.S. economy, representing 70.6% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

For all the reported angst over Trump's escalating trade war with China, the Vix/10yr ratio has barely budged (see Chart #2), which suggests the market does not expect much if any damage to occur as a result. My own assessment is that rising tariffs are acting as a headwind to growth, but that this will not prove terribly disruptive. Without this headwind, the economy would likely be on its way to sustained growth of 4% or more; with the headwind, we're more likely to see 3-4% growth. For Trump's purposes, I believe, higher tariffs are a temporary disruptive factor that is necessary to achieve a long-term reduction in overall tariff barriers and freer overall trade. It's a risky gambit, to be sure, which could backfire if China continues to counter Trump's tariffs with more of their own. But in the end, tariffs are so universally understood to be counter-productive that I find it hard to believe the escalation won't reverse sooner or later.

Chart #2

Meanwhile, the ongoing flattening of the yield curve (see Chart #3) is not a danger signal. It's more accurate to say that it reflects the market's judgement that, if anything, tariff wars will keep the Fed from hiking rates more than just a few times over the course of the next year, because the economy is not likely to "overheat." To date, no one is suggesting the economy will prove so weak that the Fed will need to lower rates: that's what would be necessary for the curve to invert. We'd also need to see much higher swap and credit spreads, which so far remain quite low, as I noted yesterday.

Chart #3

10 comments:

Sonal Jain said...
This comment has been removed by a blog administrator.
marcusbalbus said...

were you a dead head, or is your head....

Rich said...

If you’re going to confront China, then do it with your allies rather than confronting every country with tariffs simultaneously.

Benjamin Cole said...

People are saying we will have an inverted yield curve soon in the United States and that we already have one in many foreign capital markets.

Keep one eye open!

Rich said...

A question for Scott: are the historical implications of an inverted you curb still valid?

Scott Grannis said...

Rich: the historical implications of the yield remain valid. When the yield curve is positively-sloped, even by a little, that implies the market expects the Fed to raise short-term rates in the future, and that in turn implies that the economy is likely to be healthy and/or inflation pressures are likely to rise if the Fed doesn't raise rates. A flat yield curve means the market sees no Fed rate hikes, which in turn implies a steady-state economy with no inflation pressures. An inverted curve means the market believes the Fed will cut rates in the future, which in turn implies that the economy is likely to be weak and/or inflation is likely to fall below target.

The yield curve is principally driven by Fed rate expectations, which in turn are driven by the market's and the Fed's expectations for growth and inflation. I don't see that ever changing, at least under the current Fed policy regime.

Rich said...

Thank you, Scott.

Alain said...

Where is the Panglossianguy?

Tom Nugent said...

Too much attention is given to the yield curve and a couple of 1/4% increases in the fed funds rate. In the old days (1984) the Fed raised the ff rate 4% early in that year and the world didn't come to an end. Back then I had a 16 3/4% mortgage and a 21% car loan and the world didn't end. My guess is that there is only accounting for the impact on borrowers and not savers. This time around, the demographics should produce more income for savers than rising costs for borrowers. Imagine if the Fed's policy of raising interest rates actually stimulates the economy through the impact on savers!

Adam said...

A good one on very hot topic.
https://www.cfr.org/blog/what-would-happen-if-china-started-selling-its-treasury-portfolio