I have noticed an increase in discussions about the probability of a recession in the near future. I am referring to a potential recession in the US, although weak economic reports overseas have been presented as possible contributors to a potential domestic recession. Another recent event that prompted discussions about a possible recession was the yield curve inversion that occurred over the summer. In fact, my colleague Steve Banker noted this event in his August article, Demand Planning Breaks Down During Recessions. To be clear, he did not forecast a recession. He simply noted the event and continued to discuss demand planning difficulties during recessions. Yesterday the stock market declined in a similar manner. This time the decline was partially attributed to trade disputes and soft manufacturing data. Let’s take this opportunity to review some of the data relevant to the logistics profession.
ISM Report on Business
Purchasing managers indexes are often considered leading indicators of overall economic activity. The ISM released its November Manufacturing ISM ROB on Monday. The November PMI registered 48.1, the second month in a row with a reading below 50, indicating that the manufacturing economy is generally declining. However, ISM also notes that “A PMI® above 42.9 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding.” The November report heading also says “GDP Growing at 1.5%.” In my opinion, these data points imply to me that the current manufacturing PMI is not typically indicative of a recession. Transportation Equipment is one of the 18 listed manufacturing industries. It was listed as one of the 12 industries reporting a decline for November.
The ISM will release its November Non-Manufacturing ISM ROB (NMI) later today (12/4). The October NMI registered 54.7, indicating non-manufacturing sector growth for the 117th consecutive month. Transportation & Warehousing was one of the 13 non-manufacturing industries reporting growth for the month.
US Government Statistics
The US Census Bureau’s Advance Economic Indicators Report for October shows that exports were down 3.7% year-over-year, and down 0.7% from the prior month (September 2019). The BEA GDP report for Q3 2019 shows 2.1 percent annualized growth for the quarter. However, private domestic investment in nonresidential structures was down 12 percent and investment in equipment was down 3.8 percent. A reduction in transportation equipment investment was a substantive contributor to the overall equipment decline.
The 12 percent reduction in nonresidential structure investment is concerning, so I took a look at CBRE’s US Real Estate Market Outlook 2020. CBRE notes in the report “Despite some softening in the industrial & logistics market, overall fundamentals will remain strong due to continued e-commerce penetration and demand for logistics space.” The report also states that “demand for light-industrial warehouses of less than 120,000 sq. feet will accelerate as e-commerce companies race to offer same-day delivery to customers.
- GDP growth is slowing, but not contracting.
- Trade is a weak spot, as is private investment spending.
- There are some signs of weakness in purchasing of transportation equipment. However, need additional insights to determine how this relates to the transportation of goods.
- Transport and warehouse services and demand for warehouse space remain strong. In fact, warehousing in support of ecommerce fulfillment appears to be an exceptionally strong point in the US economy.
- In conclusion, logistics in support of ecommerce is driving the logistics sector and appears as a secular trend with growth that is likely to occur throughout the macroeconomic cycle.