Date: Wednesday, May 3, 2023
Across the physical economy, executives and analysts are projecting that the second half of 2023 will bring a rebound. That includes containerized U.S. import volumes, which sees its peak season in late summer to autumn. Some believe U.S. import demand has hit the bottom.
However, further downside risks have emerged for the U.S. economy. It’s wrecking the odds of a second-half rebound in import volumes.
Last June, SONAR’s ocean container bookings data revealed that U.S. import demand for containerized goods was dropping off a cliff, just a few months after FreightWaves’ U.S. truckload data first signaled that a freight recession was imminent. Now, the freight recession of 2023 has officially arrived.
The latest ocean container bookings data from SONAR in the chart above reveals that U.S. containerized import volumes in 2023 (white line) have been trending alongside 2019 levels, which was the last freight recession. This is largely no surprise given this same SONAR data had been projecting this full-on reversion back to pre-pandemic levels for months, but it would also be wise to exhibit caution in assuming these import volumes have already bottomed for this downcycle and are positioned for a second-half rebound during peak season.
As we can see above, in 2019, import volumes followed a very irregular pattern in the second half of the year. There was no clear rebound in volumes during the traditional peak season months that year.
The latest ocean container bookings data for U.S.-bound container volumes departing China again highlights the continued weakness in U.S. import demand that is exhibiting no clear signs of a rebound. This weakness in container volumes is confirmed by the latest contraction in April of Chinese manufacturing data. According to the National Bureau of Statistics, the official manufacturing Purchasing Managers’ Index (PMI) declined to 49.2 from 51.9 in March — and below the midway point of 50 that delineates expansion and contraction.
reopening would cause a surge in container volumes are fading. Without a rebound in the manufacturing sector of the United States’ largest trading partner for containerized ocean imports, a second half-rebound in U.S. import volumes seems even more improbable.
At the turn of the new year, the inventory glut carried over from 2022 by U.S. importers was one of the primary headwinds against import demand. It appeared likely that in the first six months of 2023 that these importers would be able to burn through these excess inventories, enabling them to begin a typical seasonal replenishment cycle that would boost second-half volumes in time for peak season. However, the latest inventory data from the Logistics Managers’ Index (LMI) in the chart above shows both inventory levels (white) and inventory costs (green) still registering above 50 — and still in expansion.
The continued difficulty U.S. importers are having in burning through excess inventories is being exacerbated by weakening consumer demand, which the latest credit card data from the Bank of America (BOA) reveals may already be happening. In its latest report, BOA wrote: “Card spending per Household fell sharply by 1.5% month-over-month (m/m) in March on a seasonally-adjusted (SA) basis. We forecast a below-consensus 1.0% m/m decline in the Census Bureau’s retail sales ex autos figure for March.”
There are also other indicators pointing toward weakening consumer demand through Q2. The chart above comes from FreightWaves’ chief economist, Anthony Smith, in his April market update. He used it to highlight that “consumer credit increased another 3.8% on an annual basis with revolving credit, which included credit card spending, rising 5% over the same period. Quarterly delinquency rates are also rising as personal savings remain well below pre-pandemic levels.”
He went on to express additional concern surrounding consumer debt via the utilization of “buy now, pay later” options proliferating throughout the e-commerce space. As we move deeper into Q2, there are clearly increasing risks surrounding the U.S. consumer that may soon be pushing the upper limits of their spending power (possibly becoming overextended) through the use of credit.
The increased risk and concern surrounding U.S. consumer demand adds even more emphasis to the U.S. labor market and its role in the financial health and solvency of U.S. consumers. And now, even the labor market is exhibiting some worrisome signals for the looming U.S. recession. While the recent unemployment rate dropped from 3.6% to 3.5%, that was one of the few remaining positive data points for the U.S. labor market. Other key labor market figures are beginning to signal that the labor market could see a sharp reversal in the months ahead.
For starters, initial jobless claims received a historical revision in the last release and now shows 245,000 claims in the most recent week — a major revision to the previously reported sub-200,000 figures in the last edition. Additionally, continued claims continue to rise, highlighting the difficulty for those who are jobless in finding employment.
According to the latest ADP employment report, the job openings data showed a drop from 10.6 million to 9.9 million, along with an easing trend overall in private sector job growth of 145,000 in March, below both revised February figures of 261,000 and forecasts of 200,000.
Arguably the most notable figures surround which industry segments accounted for the job losses. For the services sector, it was led by financial activities (minus 51,000), professional/business industry (minus 46,000), and information (minus 7,000). In the goods-producing sector, it was manufacturing (minus 30,000). The report quotes Nela Richardson, chief economist at ADP, as saying, “Employers are pulling back from a year of strong hiring and pay growth, after a three-month plateau, is inching down.”
All of the economic concerns discussed thus far are likely to only be amplified in May if the Federal Reserve pursues raising interest rates by another 25 basis points, while the U.S. financial sector faces an accelerating credit crunch that has been triggered by the recent bank failures of First Republic, Silicon Valley Bank, Signature Bank and Credit Suisse.
The below chart features the Fed’s H.8 data from the beginning of 2023 to the most recent update from the week of April 12. Immediately following the U.S. bank failures, commercial banks began tightening their credit standards (blue, right), while beefing up their cash reserves (red, left) in what can only be perceived as the sector preparing against the growing risks that will arise from the tightening of credit to a U.S. economy already expected to enter a recession in Q3 and Q4 of this year (at least).
An April 21 Bloomberg article titled “A Corporate Credit Crunch Is Just Getting Started” highlights some concerning signs of corporate distress that have developed amid the growing corporate credit crunch that has been accelerated by the recent bank failures. For starters, “small businesses say it hasn’t been this difficult to borrow in a decade; the amount of corporate debt trading at distressed levels has surged about 300% over the past year, effectively locking a growing swath of businesses out of financial markets; bond and loan defaults have ticked up; and the Federal Reserve says banks have tightened lending standards.”
In examining the U.S. Treasury Yield Curve in the chart above, we can see that the markets are placing huge bets that, regardless of what happens in May, not only is it likely to be the end of the hiking cycle but that it is also likely that there will actually be multiple rate cuts in the second half of this year. So, the markets seem to be increasingly convinced that the worsening economic conditions in the coming months will force the data-dependent Fed’s hand into a full pivot. Interestingly, in all major U.S. economic downturns in the 21st century, it was only after the Fed started to actually cut interest rates that the equities market officially hit the bottom.
Given the mounting economic headwinds facing U.S. import demand for the remainder of 2023, a second-half rebound not only seems increasingly unlikely, but we could see U.S. import demand further deteriorate. The industry should be prepared for the growing likelihood of U.S. import demand potentially declining further in the back half of the year. That’s a spooky sign for the economy at large.