How bad will it get?

How low can it go? That is the question for second quarter economic output. The Bureau of Economic Analysis reports that first quarter real, which means inflation adjusted, gross domestic product contracted at a 4.8 percent annualized rate from the final quarter of 2019. Worse than feared, and it doesn’t bode well for the second quarter reading. Instead of a 20-25 percent decline, it could be 30 percent or more. The GDP data goes back to 1947, and over that time, the single worst quarter was during the first three months of 1958: -10 percent.            

The opening of the economy is going to take time, and it’s not going to happen in a smooth way. No one knows for sure the shape, size, or duration of the recovery.

As expected, consumers gloomy

Consumer confidence fell sharply in April, with the Conference Board saying its index of consumer confidence sank to 86.9 in April from a revised 118.8 in March.

Despite this unprecedented drop, a measure of consumer expectations rose slightly signaling an increase in the share of respondents who think business conditions will have improved six months from now.

The University of Michigan survey of consumer sentiment released Friday registered a similar gap, as the index of current conditions plunged 29.4 points in April, compared with a 9.6-point fall in the expectations index.

On the cusp of past recessions, current conditions typically peaked while expectations bottomed out, said Richard Curtin, the University of Michigan survey’s chief economist. “Now we have the opposite,” he said. “The whole situation is completely unique in the history of our surveys, and we go back to the early 1950s.”

When gloomy, they don’t spend

Consumer spending, the U.S. economy’s key driver, posted its steepest monthly decline in records tracing back to 1959. The Commerce Department said consumer spending fell 7.5 percent in March. It also said personal income fell by 2 percent, the largest decrease since 2013, as employers started to cut payrolls and reduce workers’ hours and compensation. The income figures include wages, salaries, interest, dividends, Social Security and other sources.

Americans cut back on health-care spending in March, including visits to the doctor and dentist. Health-care spending accounted for a large portion of the decline in first-quarter economic output.

Grocery purchases helped offset declines at restaurants last month. Because many Americans stockpiled food in March, grocery spending might not provide as much of a boost in April.

Durable goods take a beating

Orders for aircraft, cars and spare parts fell sharply in March, and consumers’ souring view on the economy is reflected in the numbers.

New orders for aircraft and parts fell by more than $16.3 billion in March from February according to the Commerce Department. Since orders are recorded on a net basis, the figure incorporates canceled orders. New orders for automobiles and parts fell 18.4 percent in March.

Overall orders for durable goods, products designed to last at least three years, were down 14.4 percent in March, the biggest monthly drop since August 2014.

Excluding the volatile transportation sector, orders were down a more modest 0.2 percent. New orders for nondefense capital goods excluding aircraft, a closely watched proxy for business investment, were up 0.1 percent.

Inventories fall

Nonfarm inventories value fell nearly $10 billion in the first quarter of 2020 compared to the fourth quarter of 2019, according to early estimates from the Bureau of Economic Analysis (BEA). The drop is the first sign of contracting inventories since the second quarter of 2018.

February inventory data from the Census Bureau, the most recent available, show a year-over-year increase in inventory for manufacturers but declines for retailers and wholesalers. Meanwhile, manufacturers experienced a year-over-year decrease in sales but retailers and wholesalers saw increased sales in February prior to the shut-down.

I would expect that the inventories pulled forward by those avoiding the China trade war tariffs are depleted. Expect inventories to rise as the pandemic exposes the fragility of just-in-time supply chains for many industries.

Services sector hit hard

The Institute for Supply Management’s nonmanufacturing index fell to 41.8 in April, down from 52.5 in March and the lowest reading since March 2009. Separately, private data firm IHS Markit said on Tuesday its U.S. services index, a survey-based measure of activity in industries such as finance, hotels and transportation, saw its sharpest one-month decline since the survey began in October 2009, falling to a seasonally adjusted 26.7 in April from 39.8 the prior month.

For both surveys a level above 50 indicates expansion, while a level below 50 signals contraction.

Money for nothing

Roughly half of all U.S. workers stand to earn more in unemployment benefits than they did at their jobs before the coronavirus pandemic shut down wide swaths of the U.S. economy. The package of coronavirus stimulus laws Congress passed in March included a $600 boost to weekly unemployment benefits through July 31. As that support is added to state benefits, the average weekly payment to a laid-off worker should rise to about $978, more than many workers received before the crisis hit.

The stimulus measure means many low-wage workers will avoid significant harm to their finances in the coming months, it puts money in consumers’ pockets, and puts the U.S. economy on firmer footing to rebound. The enhanced benefits also create disincentives that might hamper efforts by employers to recall workers at a time when some states are trying to reopen their economies.

Manufacturing suffers

The Institute for Supply Management said Friday its manufacturing index fell to 41.5 percent from 49.1 percent in March. That was the lowest level since April 2009.

A sub-index for manufacturing production fell to 27.5 in April, the lowest reading in records going back to January 1948. A sub-index of employment likewise declined to the lowest level since 1949 as firms laid off or furloughed employees due to sharply reduced demand and social-distancing rules.

A separate gauge of U.S. manufacturing also showed output in April fell the most on record as firms shut down and canceled orders to halt the spread of the coronavirus. The U.S. manufacturing purchasing managers’ index fell to 36.1 in April from 48.5 in March, according to IHS Markit. The reading was the lowest in 11 years.

More business doesn’t help

A surge in business during an outbreak doesn’t help as Amazon and UPS experienced a rise in eCommerce orders recently.

 At Amazon, Bezos said “Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit. But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on COVID-related expenses getting products to customers and keeping employees safe.”

“Those expenses include spending on protective equipment for employees, cleaning company facilities, less efficient processes designed to keep workers safe, higher wages for hourly employees and investing “hundreds of millions to develop our own COVID-19 testing capabilities,” Bezos said.

Amazon hired an additional 175,000 employees in March and April to meet the increased sales spurred by the coronavirus outbreak. It also said it had suspended more than 10,000 sellers on Amazon’s marketplace for price-gouging.

Fulfillment expenses soared 34.1 percent to $11.531 billion during the first three months of 2020, up from $8.601 billion a year earlier. That helped drag down net income 28.8 percent to $2.535 billion from $3.561 billion in the first quarter of 2019.

At UPS, the share of deliveries in the company’s main U.S. segment that went to homes rose to nearly 70 percent by the end of March, compared with around 54 percent over all last year.

Operating profit for that business fell more than 40 percent as the company said drivers are having to travel farther and make more stops on their daily routes to keep up with rising demand. In addition, packages to homes are about 33 percent lighter, generating less revenue than the bulkier shipments that would go to businesses.

Current freight market

National freight volume movement has nearly come to a halt over the past week. FreightWaves reports the outbound tender volume index has been flat for more than 10 days within the 8,500-8,700 range. The current freight volume is at a level that would be typical for a national holiday like Independence Day or Labor Day. The current OTVI reading is the lowest of any non-holiday value in its three-year history.

On the positive side, 11 of the 15 major freight markets FreightWaves tracks were positive on a week-over-week basis. This ratio is a dramatic improvement from recent weeks. The markets with the largest gains in OTVI.USA were Memphis (26.27%), Laredo, Texas (18.26%) and Seattle (14.27%). On the downside, this week saw a decline in Dallas (-10.83%), Savannah, Georgia (-2.99%), and Houston (-2.77%).

There is a potential capacity shortage by the end of the year, caused by unseated trucks and trucking bankruptcies.

The trucking industry has been searching for the bottom, with a lot of disagreement about when it would come. The bears believe that the worst is still ahead, caused by rapid unemployment, declines in consumer spending, energy market softness and slowing port activity. 

On a side note, personal travel in the U.S. is down 46 percent since lockdowns began in mid-March. The decrease was far less for truck drivers, however. They logged 13 percent fewer vehicle miles traveled from April 11-17 compared to a baseline before the orders were issued, according to traffic data firm Inrix.

DAT Solutions reports that in the week ending May 3rd, the national average van rate in April was the lowest since September 2016, while flatbed and reefer rates hit their lowest points since early 2017. Load-to-truck ratios were also at historic lows, but increased volumes last week reversed that trend, with freight markets entering produce season as some states begin to relax their stay-at-home orders.

Looking at the national dry van rate trend.

February - $1.79 per mile

March - $1.87 per mile

April - $1.64 per mile

May - $1.51 per mile

Rail hits historic lows

First-quarter 2020 intermodal volumes fell 6.7 percent to 4,177,989 units compared with the same quarter last year, according to Intermodal Association of North America (IANA) data.

Year over year, international intermodal volume (2,057,685 containers) dropped 11.3 percent, while domestic volume (1,862,499 containers) climbed 2.2 percent and trailers (257,805) plunged 23.3 percent, IANA officials said in the association's Intermodal Quarterly report.

The volume decline follows an annual loss of 4.1 percent in 2019, IANA officials said.

The broader U.S. freight market likewise was awful. Rail traffic plunged 21.2 percent in April to 2,075,958 carloads and intermodal units compared with April 2019, a reflection of the COVID-19 pandemic's impact on the economy, according to the Association of American Railroads (AAR).

For the first four months of 2020, U.S. railroads logged 3,973,586 carloads, down 11.8 percent, and 4,273,708 intermodal units, down 10.9 percent, compared with the same period last year.

At Wagner Logistics

As cases increase every day, it reinforces the seriousness of the situation and realizing it takes a group effort to keep everyone safe. My hat is off to our managers and employees who despite the disruption, continued to service our customers.

Our customers are appreciative of the extraordinary efforts of our teams exemplifying the “Bring It” motto our teams exhibit every day. Our company is a resilient group of people overcoming challenges every day during these tough times.

For me, working at home now for 9 weeks is getting harder as I miss seeing our associates and the interactions. But it’s necessary to continue to keep everyone safe. I’m looking forward to resuming occupancy at the home office in June.

As always, I hope that we at Wagner may have the opportunity to demonstrate our commitment to making your supply chain better. The Wagner team is innovating and continually improving our people and systems.

What may Wagner Logistics do for you? We have an extensive history of 74 years of service to our customers and would love the opportunity to collaborate with you.

As we say every day, Bring it!

Have a great day!

John Wagner Jr. 

About Wagner Logistics

Wagner Logistics was founded in 1946 on the principle that every customer is a big deal and that continues to pervade our mentality, producing a superior customer experience. The company began in trucking and remains dynamic offering top-notch transportation, dedicated warehousing and robust fulfillment services. We strive to produce innovative solutions, in addition to our superior onboarding process which makes transitions seamless, and have been honored 18 years in a row by Inbound Logistics as a Top 100 3PL. Our customers drive our entry into new geographic markets, technological advances and ever-changing distribution challenges. Where do you want to be? Wagner says, Bring It!