The economy is, simply put, in crisis.
We’ve written before on what the coronavirus pandemic could mean for the supply chains of the future (and what it might mean for Mexican manufacturing), but in the here and now it’s harder to know when the “future” will actually come.
Lockdowns continue to extend, cases continue to rise, and as the world contemplates a slow reopening the line between “the pandemic” and “after the pandemic” is blurred. But for the 40 million Americans currently grappling with unemployment, the question isn’t when the pandemic will end – it’s when the economy will recover.
How will we know when the economy is on the mend? Aside from the usual indicators (like the stock market and unemployment rate) some have turned to logistics, one of the oldest and largest essential functions in the US, to act as a national barometer for financial health and wellness.
Logistics, some posit, could be the canary in the COVID-19 coalmine – the first to feel the squeeze as ocean ports emptied long before consumer shelves.
But will logistics be the industry that’s also the first to signal recovery?
Freight as an Economic Predictor
There are a few intuitive arguments for why the freight industry might speak to broader economic trends. Simply put, trucks are tied to demand. If demand decreases, fewer products are ordered. Fewer products ordered means fewer trucks are needed to move that product.
It’s not a perfect 1:1, but because trucking touches a huge swath of industries, seeing a depression in trucking can signify that more than one industry is grappling with an economic dip. Separate, otherwise unconnected verticals become dominoes when aggregated within the freight market.
Logistics is also unique because it deals with markets that are somewhat isolated from consumer demand. For example, heavy machinery and components tied to the industrial and construction sectors account for a large portion of freight volume.
In fact it’s this aggregation that leads some organizations, including the U.S. Department of Transportation’s Bureau of Transportation Statistics and Cass Information Systems, to use freight as their leading method of monitoring the economy:
“We place our trust in the simple notion that the movement of tangible goods is the heartbeat of the economy, and that tracking the volume and velocity of those goods has proven to be one of the most reliable methods of predicting change.” – Cass Information Systems
Even outlets like Forbes have nervously watched freight volumes decline, declaring “with freight traffic dropping, the economy could soon get dizzy… and we’ll all feel it then.”
When you look at it from point A (decreased demand in multiple industries) to point B (decreased freight volumes) It makes a lot of logical sense for a freight recession to predict a general recession.
Freight as a False Alarm
…But even in the world of shipping it’s rarely as simple as point A to point B. There are a lot of things that can trigger a recession in freight while sparing the economy at large. Diesel prices, mismanagement within trucking companies, and a growth in retail stockpiles for another.
Freight is so sensitive that it’s faced 12 major recessions since 1972, twice as many as the overall economy. The same broad scope of goods that makes logistics a good predictor at face also make it more vulnerable to small-scale shifts that never materialize into a large scale recession.
Bottom line: freight is more volatile overall.
COVID-19 and Economic Recovery
The coronavirus pandemic represents a unique moment in the global economy.
It couldn’t be predicted by any standard economic model, freight based or otherwise. Some economists are even labeling it a “fake recession” due to the bizarre circumstances of the downturn – though the fallout remains very real. So now comes the big question: can freight predict a swift economic recovery?
According to experts it’s a resounding…maybe?
In some ways, the same logic that goes into predicting recessions can be cross applied to recoveries.
Shipping is a prime “real-time” activity that can lend moment by moment insight into how strong a recovery will be, acting as a “bellwether of global trade.” In fact the Baltic Dry Index (a freight index) is considered critical for economic forecasting, and can predict both increasing and decreasing global economic growth.
This is due in no small part to the global, interconnected nature of the American economy. In addition to connecting many verticals, freight connects many countries. If worldwide freight volumes increase that can signify growth on a much larger (and therefore more stable) scale. By some measures, including those of Stanford economist Matthew Jackson, an economic recovery will only be possible if conducted on a global scale. There are few measures so global as trade.
All that said, freight is far from the only predictor of better days ahead. GDP, consumer confidence, and unemployment are all tried and true ways to monitor growth post-recession. When taken in tandem with more reactive and fast-moving freight indicators, economists can paint a more complete picture of an economic upswing.
What You Should Watch
The Baltic Dry Index is reported daily by the Baltic Exchange in London. The index provides a benchmark for the price of moving major raw materials by sea. The index tracks rates for capesize, panamax and supramax vessels that ferry dry bulk commodities. The Baltic Dry Index is, despite the name, not restricted to Baltic Sea countries or to a few commodities like crude oil. Instead, the Baltic Dry Index takes into account 23 different shipping routes carrying everything from coal and iron ore to grain.
The Manufacturing ISM Report On Business® is based on data compiled from purchasing and supply executives nationwide. Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers’ Inventories, Employment and Prices), the report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction, the negative economic direction, and the diffusion index. A PMI™ reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining.
The US Bureau of Transportation Statistics has published some excellent charts evaluating transportation as an overarching economic indicator. While these charts aren’t updated as frequently as the other examples in this list, they do point out some of the most important data points to watch including freight transportation modal data, and industrial production, manufacturers’ shipments, and freight transportation services.
The (Literal) Bottom Line
Logistics is not a perfect crystal ball through which economists may view the world’s economic future. Overall, it’s best to keep a pulse on multiple outlets and indexes.
However, when it comes to economic predictors, one could do worse than freight.