Certain portions of the goods economy are collapsing right now, says FreightWaves CEO Craig Fuller

Key Concepts

• Freight Market Data: High-frequency data compilation on the freight market.
• Goods Economy: The sector of the economy related to the production and movement of physical goods.
• Trucking Volumes: The quantity of freight transported by trucks, a significant indicator of economic activity in the US.
• Retail Freight: Freight associated with the retail sector, primarily for local distribution.
• Industrial Sectors: Sectors involved in long-haul freight, including energy, automotive, housing, and manufacturing.
• Macroeconomic Pressure: Broad economic forces impacting businesses, such as inflation and interest rates.
• High Interest Rates: Increased cost of borrowing, discouraging long-term investments.
• Tariffs: Taxes on imported goods, impacting wholesale prices.
• Wholesale Prices: Prices at which goods are sold by manufacturers or wholesalers to retailers.
• Consumer Prices: Prices paid by end consumers for goods and services.
• Long-Haul Goods Segments: Industries that rely on extensive transportation networks for their products.
• Hyperscalers: Large-scale cloud computing providers.
• De Minimis Threshold: A customs regulation allowing for duty-free importation of goods below a certain value.
• Parcel Companies: Companies specializing in the delivery of smaller packages (e.g., FedEx, UPS).
• K-Shaped Economy: An economic recovery where different sectors or segments of the population experience vastly different outcomes.
• Federal Reserve: The central bank of the United States, responsible for monetary policy.
• Housing Market: The sector of the economy related to the buying, selling, and construction of homes.

Economic Downturn in the Goods Economy

Craig Fuller, founder and CEO of FreightWaves, highlights a significant downturn in certain segments of the goods economy, drawing parallels to the Great Financial Crisis.

• Trucking Volumes Decline: Year-over-year trucking volumes, representing the majority of freight movement in the US, have fallen by 17%.
• Divergent Sector Performance:
  • Retail Freight: Freight tied to the trucking market and local distribution for retail is flat, indicating consumer resilience. This is likely why the Federal Reserve is not overly concerned, as consumer spending remains persistent, as evidenced by retail earnings.
  • Industrial Sectors: Freight related to energy, automotive, housing, and manufacturing has seen a substantial decline of 30% year-over-year. This level of contraction is comparable to the Great Financial Crisis.

Drivers of Industrial Sector Slowdown

The deterioration in industrial sectors is attributed to several macroeconomic factors:

• Macroeconomic Pressure: General economic headwinds are impacting these businesses.
• High Interest Rates: Companies are hesitant to make long-term investments due to the increased cost of borrowing.
• Tariff Impact on Wholesale Prices: Inflation related to tariffs has primarily affected wholesale prices of goods, rather than directly increasing consumer prices. This has significantly impacted the cost of imported raw materials for manufacturers.
• Sector-Specific Issues:
  • Housing: A widely discussed issue on CNBC.
  • Automotive: Facing challenges with credit quality.
  • Energy: Experiencing an oversupplied market.
• Manufacturing as a Core Impacted Area: The primary driver of the slowdown is the impact on manufacturing, which is counterintuitive given that tariffs were intended to boost domestic manufacturing. Instead, demand in the manufacturing economy has significantly decreased.

Employment Implications

The decline in long-haul goods segments has serious implications for employment:

• 35 Million Jobs at Risk: Approximately 35 million people are employed in jobs tied to the long-haul goods segments (energy, auto, housing, manufacturing, and transportation).
• Contrast with Tech Sector: This is contrasted with the much smaller number of jobs (two million) in the hyperscaler sector.

Impact of De Minimis Threshold Elimination

The elimination of the de minimis threshold has had a noticeable impact on freight movement, particularly for parcel companies.

• De Minimis Loophole: Previously, goods below a certain value could be imported without tariffs and duties. This was utilized by companies, including some American brands, by establishing distribution centers in countries like Mexico or Canada and trucking goods across borders.
• Impact on Parcel Volumes: The de minimis exemption was often reflected in parcel volumes. With its removal, parcel companies like UPS have seen a decrease in volumes.
• FedEx and UPS Outlook: This is cited as one of the reasons FedEx and UPS have reported less optimistic outlooks.
• K-Shaped Economy and De Minimis: While the de minimis factor is relevant, it's one of many contributing to the freight demand slowdown. The overall economic picture is described as K-shaped, with affluent consumers doing well and those in the industrial segment struggling.

Indicators for Economic Recovery

Fuller suggests key indicators to watch for a turnaround in the freight market:

• Housing Market Revival: The housing market needs to rebound. As much as 20% of the trucking market is indirectly related to housing. When homes are bought, whether new or existing, it drives demand for new cabinets, appliances, furniture, and flooring, all of which generate substantial freight.
• Federal Reserve Easing Rates: This is considered the most crucial factor for the freight market. A recovery in housing is unlikely without the Federal Reserve easing interest rates.

Conclusion

The US goods economy is experiencing a significant contraction, particularly in industrial sectors like energy, automotive, housing, and manufacturing, with year-over-year trucking volumes down 17% and industrial freight down 30%. This downturn is driven by macroeconomic pressures, high interest rates, and the impact of tariffs on wholesale prices. The elimination of the de minimis threshold has also contributed to a slowdown in parcel volumes. A recovery in the freight market is heavily contingent on a rebound in the housing sector and a subsequent easing of interest rates by the Federal Reserve.