It’s not the consumer.
By Wolf Richter for WOLF STREET.
Freight shipment volume in the US by truck, rail, air, and barge of consumer and industrial goods but not bulk commodities declined 3.3% in November from a year ago, the 12th month in a row of year-over-year declines, according to the Cass Freight Index for Shipments. This follows a huge boom in shipments through much of 2018, but by November last year, that boom was already fizzling, and by December last year, shipments declined on a year-over-year basis for the first time since the last freight recession. Note the infamous boom-and-bust cycles of the business:
The Cass Freight Index tracks shipment volume of consumer goods, industrial products such as construction materials, equipment and components being shipped to or by manufacturers, supplies and equipment for oil & gas drilling, and many other things. But it does not track bulk commodities, such as grains. Cass derives the data from actual freight invoices paid on behalf of its clients ($28 billion in 2018).
The boom levels last year had been stimulated by pandemic efforts all around to front-run the tariffs by loading up on merchandise. But November’s drop in shipment volume didn’t just put the index below November last year, but also below 2017 levels and 2014 levels and nudged it closer to the lows of the 2015 and 2016 freight recession.
In the stacked chart below – note the seasonality of the business – the red line represents the index for 2019. The top black line represents 2018, the purple line 2017, and the yellow line 2014:
Freight expenditures tick down but remain high.
Declining demand for transportation services, as seen in the drop in shipment volume, has started to put pressure on some freight rates, such as in trucking. But FedEx, UPS, and other freight companies have raised their rates, as ecommerce is booming. And many contracts were negotiated near the peak last year. So despite the declining shipment volume, freight expenditures – a function of shipment volume and freight rates – remain historically high.
The total amount that shippers, such as manufacturers, retailers, or industrial companies, spent on freight by all modes of transportation – rail, truck, air, and barge – declined for the fifth month in a row, down 1.4% in November compared to a year ago, but was the second highest for any November.
Just how powerful the surge in freight expenditures was last year – on high volume and high rates – becomes obvious in the stacked chart below. The top black line denotes 2018. The yellow line denotes 2017. For most of last year, freight expenditures completely blew past any prior record and peaked in September 2018 with a year-over-year surge of 19%, that then began to fizzle:
Where does the decline in shipment volume come from?
Retail sales are fine, powered by ecommerce. Retail sales in November rose 3.1% from November last year. Not red-hot growth, but solid growth. Brick-and-mortar retail sales continue to get crushed, but ecommerce is growing at a red-hot pace, and the speed with which it is gaining share appears to be picking up. All these goods need to be shipped from the port of entry or from the manufacturer in the US across the fulfillment infrastructure to the consumer.
The industrial economy is weak. Industrial production – which includes manufacturing, oil & gas drilling, mining activities, and utilities – had boomed in late 2017 and 2018 as companies were front-running the tariffs. Year-over-year growth rates topped out at 5.5%, the fastest growth since the recovery from the Great Recession. But it peaked in December 2018, then started declining. The month-to-month drop was particularly sharp in October, according to Federal Reserve data. This was followed by a big month-to-month bounce in November, leaving year-over-year industrial production down just 0.8%.
Manufacturing – which is within industrial production – declined 0.7% year-over-year. These are obviously not large declines. In late 2015, during the worst of the Oil Bust, manufacturing production had declined 2.0% year-over-year. During the peak of the financial Crisis, it plunged 18%.
Construction spending ticked up 1.1% in November, from low levels a year earlier, according to the Commerce Department. In dollar terms, construction spending remains down about 3% from the first half in 2018.
The Oil-and-Gas-Bust Factor.
For more granularity, we’ll look at durable goods shipments – which include anything from washing machines (knock on wood in term of “durable”) to industrial equipment. Durable goods shipments in November fell 1.5% year-over-year.
But production of machinery and equipment for agriculture, construction, and mining — mining being dominated by equipment for shale oil-and-gas drilling — plunged 13.6% year-over-year. During the peak of the Oil Bust in late 2015 and early 2016, production of equipment for these sectors plunged by as much as 37% year-over-year, much worse than the plunge during the Financial Crisis when they’d bottomed out at -29%. This is how important the oil-and-gas sector has become to US industry.
While other industrial segments may be trying to scramble out of the decline, the oil-and-gas drilling industry is forced to cut back on purchasing equipment and machinery as money is drying up. Investors in these companies, which need much higher oil prices to be cash-flow-positive, are grappling with another existential crisis.
In 2019 so far, about three dozen oil-and-gas drillers have filed for bankruptcy. Other drillers, such as Chesapeake Energy, are jostling for position at the filing counter. They’re leaving investors exposed to heavy losses, including billionaires who thought they’d picked the bottom in 2016. Read… Fracking Blows Up Investors Again: Phase 2 of the Great American Shale Oil & Gas Bust
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There’s growing signs the shale oil Ponzi is coming to a bust.
I’m not sure if it’s a Ponzi, but it reminds me of the railroad build out in the 1800’s. The innovators and early adopters (a lot of them) went bust and the late adopters, known as vulture capitalists, made all the money.
I think that’s what you’ll see with the “fracking” boom.
The nat gas assets are very valuable (in the long run).
This is true of any industry. In its infancy, you get 1000 companies fighting to get market share. As the industry matures, there is a lot of consolidation as well as poor players going bankrupt. And eventually you end up with just a handful of major players. See auto, airlines, PCs, phones, you name it.
Don’t think this is apt. The model described refers more to underfunded early innovators, often small companies. Early tech inventions that lack capital to perfect and mass produce are typical.
If I understand WR correctly it is the industry itself that is not covering its cap ex, not just small individual companies. Chesapeake is not small and like others has had lavish access to capital.
just 600 trucking companies that went bankrupt in 2019
I’m watching lumber futures and it seems big builders are ordering now for 2020 as futures are up some 10% or more already
but I guess all that NOT qe has to go somewhere and it looks like it is more real estate
There has been signs of that for years.
Do you wanna know whwn it will die? When the US government finally let’s it die.
Looking at that first graph, you’d think shippers are all a bunch of speculators and given to excessive risk-taking.
But my understanding is that shipping operators tend to be very conservative and even defensive in their financial and logistical planning. Nevertheless they usually end up getting screwed, no matter what they do, because of the rollicking ups and downs of the customer base on which they are dependent. Industry gets a cold, shippers get pneumonia.
There is cut throat competition between truckers and railroads! Heard large scale reduction of R.R. engineers in the thousands in the last few years!
So what else before our manufacturing collapse?
New home construction still cranking.
Has been a crazy December.
Need some serious global warming to keep
the equipment in the field as long as possible
this winter. No stock buybacks here, just pay raises.
the economy is in recession now. Retail sales for October were zero in real terms and a negative .1% in November. the Ism manufacturing index has been in contraction since August of 2019. Unemployment claims have been 250 Thousand last week and 232 thousand this week. People without jobs will not purchase anything. Stores will not order any goods that are not bought. factories will not produce anything that is not ordered. I e Boing.
More importantly, shippers are not going ship goods that are not manufactured.
Tariff man destroyed 35 years of supply chains.
I don’t think we are in a recession now. It’s likely high levels of liquidity will keep the economy going for some time… until it doesn’t.
The shopping week was one week short in November due to a late Thanksgiving. It’s very likely these sales will pull into December. If they don’t, I’d share more caution.
HMmm, I think that mostly boils down to a matter of semantics.
Personally would claim we’re more or less in a global depression currently, just looking at the incessantly increasing wealth disparity and the creeping poverty and increasing stress in what used to be termed the middle class.
Way back when we used to have things like bread lines to visualise the reality of the situation, whereas many people today have some form of employment with an attached remuneration that in no way tracks the increases in aggregate costs of living, so we hide the bread lines, and instead call them things like social security, food stamps, consumer credit etc., whilst we point at stuff like ever cheaper consumer electronics to show that we’re somehow supposed to be better off.
And to top it off, I suspect soup kitchens even in western countries today are seeing more turnover than they have in living memory…
The homeless are becoming harder to hide. In the last depression the nastier areas used vagrancy laws to force them to move on, or locked them up. I would imagine the situation is becoming similar, only question is how rapidly.
If it were just mere tarrifs alone, who are the clear winners? Surely there must be some big winners from who benefit from changing flows against those facing tariffs in proportion to where flows were before… cause from where I sit, there are none, which means this was never about tarrifs at all…
Back to your regularly scheduled panem et circenses… please ignore the cumulative credit losses on the horizon.
I don’t think any downturn is about tariffs, it’s more about demographics and lifestyle choices. I try not to buy Chinese goods because I consider trade with them to not be beneficial to our national interests. I can’t think of any item that I have to buy from China. If an item I want is only produced in Asia, I buy Korean or Japanese.
One of the biggest exports these days from Asia is the minimalist lifestyle. It’s catching on here because people are already stretched thin anyway.
Boxing day sales now start at the end of November and extend into January. BigBox stores and even high end chains rolling out 50% off sales BEFORE Christmas. And just look at all the cheap garbage on Amazon, with free shipping. Clearly, the US consumer is tapped out.
1. We;’re not in a recession, not even close. Wish casting a recession doesn’t make it so.
2. All this talk about Chinese tarrifs is funny. You’d think 98% if trade is with China if you only listened to the MSM. In fact, Canada and Mexico combined dwarf the trade we do with China. Perspective my dear boy, perspective.
3. In the heyday of Obama’s “economic boom” (per MSM and leftists), UI claims were in the mid 300K range. But now at 250K, we’re in a recession. You guys crack me up. 250K is the lowest level since the early 70s. Adjusted for population growth, it’s the lowest ever But you go ahead and keep living in a fantasy world if you must.
Agree, it’s funny that so many gloom and doomers seem completely out of touch with reality. One was arguing with me the other day about the so called indisputable sharp decline in standards of living. I asked him in what way is your standard of living getting worse? We have nicer technology, nicer houses, nicer cars, nicer appliances, endless entertainment, streaming media on demand, all human knowledge accessible at your finger tips at any time, amazing navigation tech, nicer TVs and phones and high speed internet, more variety and access to foods than at any time in human history. Sometimes I think the gloom and doom warps people’s brains. If you aren’t feeling well it may be from too much doom porn, or social media, or prescription drugs? Turn off the electronics, get outside in nature, exercise, eat some healthy home cooked food, wean off all drugs, you will feel much better.
Yeah, “Let not your heart be troubled”…..right?
Agreed the notable bumps can be rationalized by Feds between meeting rate cuts. States like CA have passed mandatory (affordable) housing quotas. The job market hits lows when everyone gives on that good job. Consumer credit is usually considered a bullish economic indicator but these people are already extended. The only thing that will save them is (wage) inflation, the Fed passed on that, you can set a 10% CPI benchmark, but the guy sweeping the floor at NYSE isn’t seeing any of it. Your point on not ordering goods is similarly hidden by the switch to ecommerce. When I browse the home improvement sites I see a lot of product and most of it is not available. Right now they are blaming holiday traffic. What do they blame in January?
No, “Tariff Man” is currently in the process of destroying 35 yrs of our Politicians selling us out to Foreign Lobbyists and giving favorable trading status to our real enemy (and it ain’t Russia).
I’m no fan of Trump, but some of his policies make sense like tariffs and lowering interest rates in order to slow down the flows of global capital flooding into the US.
35 years? Double-that! Long before I was born, my father was a member of the delegation of the USA to the tariff negotiations with Japan of the contracting parties to the General Agreement on Tariffs and Trade. February 1955. The experience made him angry. I remember him in the mid 1970’s ranting in the kitchen of our family home, remembering how poorly our team negotiated. He saw it all and his assessment: “We always give away the farm! And we get nothing in return!” He tried to to stop it but was always told to shut up. Seems the team wanted to come home with a deal, any deal, even a bad deal, than no deal at all. So we took their bad deal every time. And the Asians always ran rings around us at the negotiations. A good read: “The Asian Mind Game,” by Chin-ning Chu.
Meanwhile, Nike reported quarterly “feet on the ground” results today. They grew revenues 9% YOY ,while growing pretax income at a whopping 24% YOY, as we head into year 11 of this phenomenal expansion. Never bet against America.
Pop corn and t-bills anyone ?
.
NKE traded down after hours.
I know. ZH reported this afternoon that it crashed, tanked, slid, collapsed and nosedived almost 1%.
No wonder this Santa rally was the closest thing to a gimme that i have sensed in 23 Q4’s.
Yes, ZH’s technical threshold for “collapse” is about -0.5%
Plummeted, too.
Errrm, that’s sort of like reading most news media on anything. Some sports manager says they can see improvement potential with the way a player has been working, and the press will state it as ‘coach rages against player’.
However, if there is one site on Earth where the journalistic mantra of ‘do not read below the line’ applies , then surely that place is ZH? Doesn’t apply to us fluffy sheep here, safe here with the wolf, of course.
Wolf, does Cass track in-house freight? I am making an assumption here that Walmart and Amazon own their own trucks and trailers. Would their numbers be incorporated into the Casas Index?
It tracks the shipments whose invoices it processes. For example, Walmart uses all kinds of trucking companies in addition to its own trucks. We know Walmart used Celadon because that came out when Celadon collapsed recently. I don’t know if Walmart is a client of Cass. But here is how you need to look at it: this is a very large representative sample of the shipping industry. It doesn’t track every dollar, but tracks direction, up or down, and converts this data into an index
Is everybody channel stuffing?
They are air stuffing, selling stuffing in a turkey they haven’t got, while their goose cooks.
What I find particularly interesting is that while volumes are going down, and sharply so, expenditures remain sky high.
In a usual freight cycle rates and hence expenditures would have started to come down by now already as marginal players try to stay alive and more aggressive players try to take volume from big established players.
The cycle then accelerates until it hits bottom and rates and hence expenditures start growing again. It’s the nature of the beast.
But this time is different, and it doesn’t bode well if you are a freight company owner, employee or shareholder.
When prices are this sticky, prices tend to go down all of a sudden and for everybody: you cannot keep your rates sky high if all your competitors are slashing.
When it happens restructuring hits the industry like a tsunami: companies go burst by the dozen, other downsize like mad and creditors take a hit.
Please note this is not enough to cause a “recession”: when the freight industry has similar moments it’s kinda like looking at a deep Scottish loch. On the surface it’s calm, as flat as a mirror. But a few fathoms down a tempest is raging.
UPS where I live in Maryland is so short trucks for deliveries that for the first time in my lifetime they made a delivery to my condo complex in a uhaul. Baltimore area. Over 650 trucking companies have gone under this year. Double last year. List out of companies in junk territory . Near it or in danger or in danger of going bankrupt posted on market watch this week. Btw one that snuck in was the maker of zest soap on tuesday wolf
Rentals and temps are very common for FedEx and UPS and USPS during peak season.
That zest soap maker is High Ridge brands in Stamford, Conn. Not too far from GE.
FedEx is now hiring individuals in their private vehicles to make deliveries in our rural area. Seems to make sense when the delivery volume is thin and the destinations widely scattered.
I’ve been seeing Uhauls (UPS) and Penske (FedEx) trucks making deliveries in my hood for a while. And I see USPS deliveries being made by unmarked cars as well, even on Sundays. These are package deliveries outside of the normal mail carrier routes.
Some recession.
I was outside for a couple of hours Monday afternoon when deliveries started coming. There was UPS and Fed Ex and someone driving a $500 hooptie 20 year old Honda delivering packages.
*Wishes there was a fund to invest in $500 20 year old Hondas*
Jokes aside that 20 year old honda is about the only thing in this market that isn’t overpriced.
Especially when considering it was also likely the driver’s home.
My wife and I are both ex Fdx and can’t understand why our retirement stocks has gone done like a falling rock. Something is really amiss. It ain’t your typical trucking company but thinks look shockingly bad. Hope the young guys can figure it out.
Down. Not done.
Did you put a lot of your 401K into FedEx just because you worked there?
They gave me stocks for my retirement. My wife also did the employee purchase plan. At that time she got actual certificates. Mine was put in Vanguard. Stocks and cash. I believe last year, the whole pension plan was sold to MetLife or something.
Most folks during the time I worked there had FDX stocks more than limited 401k plans. They purchased stocks from ESOP, etc., because it kept on going up and splitting. Now, I see the chart showing a 100 dollar per share drop! Ouch.
We were lucky (or old) enough to meet and know Fred. He is a very nice guy. An old style CEO who cared for people and MINORITIES.
We will never forget Fred Smith.
Fedex may be down because they don’t ship for Amazon anymore. Investors probably think that Amazon is the biggest shipper and not using Fedex is bound to hurt Fedex’s revenue. A theory doesn’t have to be true for investors to believe it.
Amazon is the poster child for “market distortion”. Enron and WorldCom did that too, but illegally.
The distortion causes all kinds of bankruptcies.
I thought one of the last two bear markets would end Amazon’s story but was wrong. At some point the distortion will end. Then competitors will start eating away at Amazon’s markets. If I knew exactly when, I’d get really rich.
When Walmart told Fieldcrest-Cannon that their prices were no longer competitive (with China), and that they should move their operations to Asia. Fieldcrest refused – didn’t want to lay-off their workers. About 35% of their business evaporated in a single phone call (WMT and the F-C CEO). Bankruptcy followed shortly after. Amazon’s pump-and-dump of a major transporter is just the grueling result of capitalist evolution or, as it’s euphemistically known: “creative destruction”. When hyenas devour antelope, you’d hardly consider it creative destruction.
I remember buying my towels from Walmart because they had a sign “Proudly Made in the USA”. At that time, I had to drive from Memphis, TN across the bridge in I-40 to Arkansas because that’s where they had lots of Walmarts. That’s the time when towels were still designed to dry you.
Fast forward to today. I have a house full of Amazon made in China junk. My wife and I plan to get rid of much of them. For the first time ever I got a Christmas card with a return addressed envelope (asking for money) from a delivery courier!
I get them yearly from my private garbage pickup guy. But now, it’s come from a delivery guy.
You need to be careful. When Amazon starts hiring anyone out of the streets, who knows if you have ex-cons delivering your junk Chinese stuff. Even your Ring doorbell’s not gonna help once criminals are delivering your stuff. Good luck folks.
I can personally attest that FedEx’s Amazon deliveries were subpar. We filed multiple complaints with Amazon.com re damaged, missing and/or late FedEx shipments to our home.
Amazon now prohibits Prime direct shippers from using FedEx and Amazon has terminated FedEx delivery service for all it its own shipments.
That’s a big chunk of business lost.
This is a true story.
Fedex lost 3 of my Amazon and Samsung shipments. While UPS and USPS has been consistently fantastic.
First of all, I know the parcel (and LTL computer) business shipping very well. I used to be the guy assigned at the Bay Area shipping a lot of computers to your offices. I am retired now. I know my delivery guys by their first name. Close enough to give them Amazon gift cards for Xmas.
I tried to get Fedex to help me a couple of time to no avail. This maddened me because I and my wife are not just ex Fedex emps but we are shareholders. So I go sick and tired, and asked my wife to call a close friend who still works at Fedex. Her office was near the Fraud Dept.
The Fraud Manager from Memphis called and I introduced myself as ex Fedex and please help me. Only then did I get the Station Manager to call me. He never returned our calls before that.
Here is the reason why Fedex SUCKS big time. Most non-express shipments are CONTRACTED OUT for the last mile delivery. They only good part is the EXPRESS part. Those with the purple and orange logo. Fedex has a GROUND department made up of acquired companies. They are horrible in my opinion.
The contract (which probably is location sensitive) is about a buck per delivery (usually a stop). They driver provides their truck and gas. Anyway, the driver came to my house and apologized. I found out he was delivering to my neighbor’s house (different driveway). Why? because he relied of his phone’s GPS. You can’t do that in a wooded area with winding roads. He barely spoke English.
UPS is a lot better. And even USPS is also a lot better. I don’t think Fedex really cares much for the parcel business since it’s cheap. Delivering business to business is its bread and butter. But the economy has changed and Fedex must adapt. But turning around the corporate culture will be very hard. I should know because I was one of them.
Iamafan,
As you know (being the proud owner of a couple of them), I’ve been shipping the Wolf Street beer mugs via FedEx. On two of them, I was overcharged by a factor of 6 – FedEx multiplied the amount it told me when I printed the shipping label by 6 after the fact, and then billed me the changed amount. OK, corporate screwups happen, no biggie. But they need to get fixed. I contacted my FedEx rep about it, and it was like talking to a wall. I tried to resolve this online, to no avail. I’ve never had shittier customer service in my life. If this doesn’t get resolved in a few days — my last resort will be some tweets that might catch someone’s attention over there — I will switch to the USPS, because surely, they cannot be worse. And I may not be the only one doing this.
You can take stuff in a bag to a UPS store and they will ship it. That must really not sit well with those hard heads down at the post office.
It’s all a matter of price. I can print the USPS label in my office and pay the USPS for postage at the same time and then mosey down to the UPS store and drop the parcel off. It’s really pretty simple. The problem is that our beer-mug box was custom-made in its dimensions for the FedEx Pack, and it’s not perfect for a standard USPS box. So I’ll have to re-think this a little.
Call someone from Memphis, TN (HQ). I used to work at the Bay Area for Fedex and I can understand your problem. Actually, I took an assignment for the whole CA, from Sacramento at that time. If you can get someone from Fraud Department or FRED SMITH’s office, then you will be taken cared of. Ask for the Station Manager in SFO to take care of you. The sales people are useless since they are not really GroudOps. Otherwise, you are out of luck and UPS or USPS is a better option. This is coming a non-disgruntled ex Fedex guy.
P.S. My wife actually worked for that customer automation department that made those shipping label gadgets. Billing is another dept. Fedex departments are like silos. Sales people could care less (more commissions). My first job at Federal Express at the time, was to pay Sales People. Good luck.
Thanks for the advice. I will try to get to the Station Manager in SFO.
My brother works for DHL. They tried and then got out of the “last mile” (retail/residential) business. FedEx didn’t have the “last mile” stuff (to “all residences and small businesses” way back when). UPS and USPS did.
FedEx used to deliver to their offices, and special businesses (large)- from what I recall.
Their systems are showing the strain because their competitors built theirs on the last mile stuff and are better at it.
I remember we used to use FedEx for overnight documents- now mostly obsolete.
You can tell Fedex that those extra 5 labels where never (barcode) scanned into the system. Therefore NEVER SHIPPED. So you should get your money back. They should never have billed you in the first place for simply just creating a label. The pickup scan is the definitive PROOF that you actually shipped the package since they picked it up.
PS. I did a lot of barcode and scanner work at Fedex so I know how this should have worked.
“I’ve never had shittier customer service in my life.”
Well, you must have never encountered the shittastic customer service of AT&T/Directv….hours on the phone for the teeniest tiniest issue. Double that for something somewhat complicated. And then an occasional hang-up after being on hold for 30minutes after being transferred because they didn’t know an answer.
FDX is down because two words…Ama-Zon. AMZN has transformed itself into a delivery company that has negatively impacted FDX. Next time you’re at an airport, look around and see how many Prime planes you see. A few years ago, all the packages on those planes used to be on FDX planes
I was just thinking, AMZN is likely going to go after the shipping business in general (i.e. doing everybody’s shipping–a la FedEx and UPS–and not just its own). Guess we’ll know when AMZN starts buying container ships and railroads (they already have aircraft).
Bezos doesn’t seem inclined to leave ANY part of the pie for anyone else.
If that isn’t a clear MONOPOLISTIC move, then what is?
It’s time we Americans get rid of Chinese garbage we don’t need.
That’s my New Year’s resolution.
“If that isn’t a clear MONOPOLISTIC move, then what is?”
It’s most definitely not a monopoly. Ever see WalMart truck on the highway? Is Walmart a monopoly? That should answer your question.
Bezos doesn’t seem inclined to leave ANY part of the pie for anyone else.
Of course not.
People in business don’t do things to “leave..pie”- e.g. they don’t hire people or be nice to competitors. This is a big misconception.
There are a couple of main principles of economics (can’t find a link right now):
– incentives cause behavior
– people always want more economic prosperity
Bezos/Amazon have two things: 1. rising stock prices (artificial?) and 2. Amazon Web Services
These service all his ventures. When #1 really reverses, Amazon will have some real problems. I thought it would happen in 2000 and 2008!
All the retail stuff, Whole Foods, shipping, etc. lose money.
Apple, Amazon, and Google just announced a major partnership, according to Business Insider.
Why isn’t this an antitrust violation?
Ray Kroc: “If any of my competitors we’re drowning, I’d stick a hose in their mouth and turn on the water.”
My macro guy, Jeffrey Snider, suggests in his Friday column that the problem is a dollar shortage or , more accurately, a lack of banking balance sheet capacity among the G-SIB banks that finance global trade. Since the dollar is the global reserve currency an inability to obtain enough $ finance to support growth in trade will show up as a reduction in exports and imports and that is exactly what is happening. Since offshore $ finance is beyond the reach of Central Banking there is no monetary solution to this short of the relaxing regulatory control over the G-SIBs
Thanks wolf
S&P 500 EPS growth was close to zero in Q3.
The yield curve is steepening, but is slightly inverted at the short term maturity end.
The GDP is growing – MRQ. Inflation is real.
Mortgage rates have risen over the past 20 days.
Today US Steel announced 1500 layoffs for an undetermined period in it’s Detroit mill. Article mentioned pipe reductions for the oil drilling equipment used in fracking. Wolf’s warnings of a fracking funding decline are biting at the manufacturing level here.
They slashed their dividend to a penny from five cents. When the commodity sector starts to rollup the slowdown is not far away.
space freight not fairing much better, perhaps requires $9.50 per hr programming? (ty petunia)
It takes a lot of experience, thought, and concentration to write good code. When a company willfully cuts corners, you get to see it, usually in expensive and tragic ways.
“It takes a lot of experience, thought, and concentration to write good code.”
Amen. I worked at it for nearly 40 years, counting college, and still didn’t feel like I’d mastered it (however, I did have a few excellent programmers tell me my code was as good or better than theirs).
Good coding–esp. coding for maintainability–takes time and effort, but it starts with thoughtful design (that’s why I loathe the term ‘coder;’ that’s the easy part).
In my years in the networking industry I’ve seen some strange code written by Principle Engineers and Distinguished Engineers who supposedly should know better.
Just an example:
On Distinguished Engineer in C++ created a base class with a method. He then copied that method exactly in every derived class. He completed missed the point of object oriented programming.
I loathe the term ‘coder;’ that’s the easy part
Coders get paid a lot less than software engineers. It’s a cost to be minimised because the goal is to maximise executive bonuses.
The worse software engineering is related to robotics in automated manufacturing. It’s typically just slapped together to get it done as cheaply as possible, not even using ‘Agile processes’, much less CMMI, resulting in the usual expensive downtime and serious worker injuries. Naturally there is no real process documentation, no real testing, no code review, and weak exception handling, if any. The Gang of Four would never approve, and Watts Humphrey must be spinning in his grave.
There’s never enough time to do it right, but there’s always enough of time to do it over.
Dave Kunkel:
He completed missed the point of object oriented programming.
You might like to check to see if he’s failed to constrain operations within the bounds of memory buffers. He sounds dangerous.
Doesn’t anybody do code review anymore? It’s a lot cheaper than catastrophic failure. Aircraft can be expensive, as can class-action suits.
Software isn’t ready for deployment until the best available engineers can no longer find a way to break it.
Anecdotal
Lowes has all xmas decorations, lights, displays, etc 50% off starting about 2 weeks ago – never saw it that early, still plenty of items left.
Ditto all the tool specials they package up for xmas shoppers ( 199 Phillip’s bits in a special plastic carrying case – you know the stuff ). List price 19, xmas normal price 14 and not moving price reduction to 8.
I was able to pick up clamp set 2 -6″ and 2 -12″, list 59 for 19. Jorgenson made in China but higher quality than harbor freight where I would have paid about 28.
Waiting for next Monday reductions, don’t need much these days but occasional fill in stuff.
re: “… higher quality than harbor freight where I would have paid about 28”
Before or after the 20% off coupon?
ps. I’ve been shopping HF for decades (was there 2 days ago as a matter of fact). The overall quality of their products seems to be going up, and they now have several grades for many items; tools, welders, etc. ; the highest grades appear to be pretty good. They’re adding stores at a blistering pace, and my local store always has lots of customers. If HF every goes public I’m gonna pick up some shares; they are stealthily invading the space Sears, etc. has vacated. There service is good, too; you get a real human on the phone when you want to check availability, etc.
I have bought stuff from Harbor Freight. They are Ok
Harbor Freight’s mass expansion has been fueled by the cheap debt explosion of CLO’s
https://www.bloomberg.com/graphics/2018-collateralized-loan-obligations/
Key excerpt:
Harbor Freight … has tapped the debt market five times since 2010, raising $6.8 billion, including refinancings and has paid about $2 billion of dividends, according to Bloomberg calculations. The company declined to comment, as did Smidt.
So, like all good capitalists in this day of easy money, CEO Eric Smidt has made himself a billionaire off of the junk bond packages of CLO’s, paying himself and other private shareholders billions with that debt and expanding like crazy to give it the Super Shiny Gloss veneer of Growth, Growth, Growth.
The New Sears! Well, considering how that went, probably not a great sales pitch for that IPO. The New WeWorks!!! ….er…..
Of course Lowes has Xmas decorations on sale now. People put up and buy decorations in late Nov or early Dec, typically the weekend of and the week following Thanksgiving.
By mid-Dec, that stuff is taking up precious shelf space for retailers. Same reason why it’s hard to find swimsuits in stores in August. Sure, it’s still beach weather, but everyone has already bought a swimsuit by August so retailers take it off the shelves or deeply discount what’s left.
Great article, but struggling to recreate the durable goods shipments chart. Which components of the durable goods shipments are you using?
That chart was mislabeled – should have read “production” instead of “shipments.” Fixed now. Thanks.
Govt says economy booming.
“Traditional (accepted by mainstream academic and govt economists) macroeconomic indicators” really are doing well. Certainly not as well as in past decades.
The bottom half of the economy has not done very well for about 20-30 years now.
The middle 50-75% is OK.
The top ~25% is doing great.
Maybe I’m becoming one of those headline surfers, but have a question.
What is defined as “freight shipments”?
Does that include UPS, FedX, and dozens of private delivery contractors?
If these are NOT in the “freight shipments”, then perhaps, what we see is that the customary “freight shipments” from vendors to brick and mortar stores declining,..shifting over to the home delivery services mention above.
But then, I might just be full of schiff on all of this.
Nah, just kinda pre-programmed.
Amazon has a lot of warehouses near you. So chances are it’s picking from “local” or nearby (<400 mile) inventory. Placing the right amount of inventory in the right place.
Amazon can easily fill its warehouses using cheap trucking (increasingly becoming their own). Because it's going 1 and predominantly Prime (<=2 days) it will have to fly some shipments by air (which they have) to their nearer warehouses. Amazon has figured out LOGISTICS. Last mile delivery is challenging but Amazon will get that, too. The only question left is the COST and efficiency/effectivity tradeoff. That's why you still see them using UPS and USPS. I won't be surprised. I order my popcorn from Alexa delivered in one day by UPS.
New metrics for shipping are needed. Last mile has become more dominant.
https://www.advisorperspectives.com/dshort/updates/2019/12/19/median-household-purchasing-power-for-the-50-states-and-dc?bt_ee=eVu9Tbe4QDvSNJk4AHqvxtA8pSPf7xtX7WUcA5r5Tu%2BOcgSSo7rk2DiwE1CuUbCm&bt_ts=1576848203091
I think that chart is a new one on AP- when the 5% turns red on the last comparative chart– then it will be the “consumers”.
Wolf, I know much of the Drilling Industry is financed by lower rated bonds and those bonds are in danger of default. My question is do you think this latest round of QE will find its way into the Drilling Industry to delay the onset of default and the contagion that could result?
Junk bonds in general are already on a total euphoria high. Energy bonds have taken a beating, but the market is still eager to take big risks for not a lot of compensation. I don’t know how much the Fed’s current repo market action will impact that. I do expect a selloff in junk bonds (and stocks) early next year. And unless oil prices rise significantly, I expect the shakeout in the energy sector to continue.
It’s not the consumer. Perfect.
If Amazon screws up, you get to fire them. They are both the vendor front and the shipper.
In the case of FedEx, UPS, and USPS, the buyer doesn’t get to necessarily choose. Usually the cheaper method works subject to time needs.
So the lousy shipping company is quite sticky unless the vendor fires them like Amazon did to FedEx. Amazon collects almost real time metrics on performance using the scans. Good for you the customer.
Whatever the strengths of this thesis, Boeing’s problems are not caused by the economy. They are pretty close to unique and not a bellwether or indicator of a trend. Maybe VW’s dieselgate is similar but not as bad. And now it’s settled.
Boeing’s order book WAS fine. It had orders for 5000 737 Max. Until last week it was still building them and had 350 sitting on the tarmac when it finally stopped production. Losses to the company are estimated at a billion per month.
One question: is this a training or software problem that can be solved with relative ease, OR, does the aircraft with these new larger, heavier, re- positioned engines have a fundamental instability in certain attitudes and power settings ?
Hopefully the answer is no. If it isn’t and Boeing has to go back to the drawing board, the slowing economy is the least of its problems.
Boeing’s problems are not caused by the economy.
They’re the result of Boeing executives cutting corners on engineering best practices to amp up their bonuses. The rest is commentary.
McNerney, former GE exec (by way of a failed stop at 3M), is the main culprit. The GE execs’ short “successes”, starting with Welch, are the epitome of luck being disguised as management skill. When they could just use financial rigging to juice up earnings at GE (as banks, insurance cos, etc.) they did OK.
Basically all of these GE execs have been discredited. Mulally, at Ford, gets some good marks, but in my opinion, he was lucky there too- but that’s a different discussion.
Industrial companies (and even some others, such as brick and mortar retail) have to have the basic technical people (vs financial types) with lots of authority. If not you get GE, Boeing, Home-Depot, etc. All victims of GE executive “skills”.
Product guys rarely become CEOs. They’re usually marketing guys.
The 737 Max had larger diameter more fuel efficient engines that could not be mounted in the same underwing position as previous models of the 737 because its landing gear was too short to accommodate the engines.
To avoid a major redesign of the landing gear and airframe of the 737, Boeing simply pushed the engines higher up against the wings so the engines could still clear the ground with the old landing gear.
This completely changed the center of gravity of the plane and its aerodynamic characteristics, so that at increased angles of attack (e.g. at take off and climbing to higher altitudes), the placement of the new engines would generate extra lift at the front of the plane and cause the plane to tip nose up even more – a positive feedback loop that meant the 737 Max now had an inherently unstable flight profile where simply pulling the nose up could cause the plane to KEEP GOING MORE NOSE UP until the plane stalled and crashed
The MCAS software was designed to prevent this instability by sensing when the nose was tipping up too high and then automatically forcing the nose down again using Angle Of Attack sensors.
The 737 Max has multiple AOA sensors, mounted with the pitot tubes (this is where the story gets confused a lot by the MSM – pitot tubes sense air pressure and wind speed, the AOAs are the little wings on the pitot tubes)
Boeing chose to offer the MCAS running on two AOAs and an alert signal when there was a discrepancy in AOA readings as a more expensive OPTION for the 737 MAX
The two 737 MAX that crashed both had the cheaper MCAS model hooked to just ONE AOA sensor. When that one AOA failed, the MCAS forced the planes to nose down until they crashed.
As part of its sales pitch for the 737 MAX, trying to portray it as just like the previous 737 models, Boeing had also concealed the existence of the MCAS and the reason it was there. Pilots were generally unaware of its existence and TOTALLY UNTRAINED on how to deal with possible failures.
Boeing in fact, DID NOT WANT airlines to have to retrain pilots flying the 737 MAX because that would have been an extra cost to the airlines that would have made the 737 MAX less desirable
Too bad, because recent revelations from Boeing’s internal documents showed that even its expert test pilots thought that emergency simulator tests of MCAS failures would be too much for the average or below average airline pilot to handle.
So, you see the problems here. The 737 MAX has an inherently unstable flight profile where it can tip nose up and stall anytime the pilot tries to climb up with the plane. The MCAS HAS TO BE THERE AND FUNCTION PERFECTLY to prevent this. If it malfunctions in the other direction, the MCAS can also push the nose down and cause the plane to crash
Now, it’s entirely the rule for high performance military jet fighters to have even more unstable flight profiles that have to be tamed with sensors and fly by wire flight control software to keep them from dropping out of the sky
But this is a CIVILIAN PASSENGER PLANE we are talking about. Civilian planes should be designed to be inherently stable and easy to fly for ordinary pilors.
I think 737 MAX is screwed. Even if the FAA passes the 737 MAX, it’s likely that other aviation safety agencies, especially Europe and China, will refuse to follow and demand a more extensive redesign of the 737 MAX. The FAA knows this and may demand more redesigns also
Excellent summary!
Thanks for good analysis. If you are correct and I think you are, B is in trouble and for those so inclined may be a stock to short.
It’s hard to say what the long term prospects are for Boeing. They may not be that bad
The 737 MAX was always a short term Boeing response to stave off Airbus’s wildly successful 320 neo, which was also just a 320 re-engined with the larger diameter more fuel efficient engines.
The underlying technology leap here was the bigger front fans on these turbofan engines, plus Pratt &Whitney added variable gearing to its version (GE-CFM makes the other version of big turbofan common to both the 737MAX and the 320 neo). The bigger front fans allowed more thrust for less fuel expenditure, which is what attracted the airlines to these new aircraft.
The 320 neo was wildly successful and gobbled up market share like crazy, including a huge 460 plane order from American Airlines. The 320 already had the longer landing gear to readily accommodate the larger diameter engines without messing up the aircraft flight characteristics
The 737 MAX was always a quickie stop gap response that Boeing needed to prevent Airbus from completely dominating this sector of the market. Boeing was able to convince American Airlines to change half of its orders for the 320 neo for the 737 MAX.
I think with this prolonged delay, and the awful publicity, it will be hard for Boeing to sell any more of the 737 MAX. The only thing preventing Airbus from taking more advantage of this situation is that Airbus can’t deliver more 320 neos any faster, and the airlines know this.
However, long term, Boeing has been working on expanding the weight savings technologies of the 787 with graphite composites etc, to other parts of its line of aircraft. It appears to be way ahead of Airbus on this, having wisely invested in developing the 787 while Airbus plowed its money into the now canceled giant A380, and flopped disastrously with the A400M military cargo plane. The A400M alone put Airbus into the hole for billions of euros.
Originally in 2011, Boeing announced its intention to build a 737 replacement along the lines of the 787, but the success of the 320 neo forced its hand into doing something much more quickly, which was the 737 MAX
If Boeing was smart (and while they may be greedy, I don’t believe they are THAT STUPID), they should be firing up that 737 replacement program again. Probably secretly already, as a backup plan
So, bottom line, the main thing that will probably save Boeing on this is that its only major competitor, Airbus, has had lots of its own problems
That was really a great read. Thanks. I just figured CG leading to nasty AOA sensitivity, but you really fleshed it all in. Either left seat experience, one very thorough investor, or both.
to Nick Kelly: from what I read there is no quick fix for Boeing. there is lot’s of info out there. Try Information Clearing House and – especially – Moon of Alabama, where you will find an impressive rundown of the errors.
Re Fedex they are “down” because they have given progressively worse and worse service at higher and higher prices. Overnight takes 2-3 days. Two day service can take up to two weeks!!! And they still expect to be paid top dollar. Customer service consists of sneers and un-answered phone calls. I think they went wrong a few years back when they paid too much for a EU company called TLT, as I recall. Down hill ever since. If it’s Fedex or nothing – I take nothing.
Peter Lynch (and co-author, John Rothchild, an excellent financial writer and humorist) had a term for corporate mergers and aquisitions: “Diworsification”.
This is why investing is so tough. Earnings up 0%. Stocks up 30%. Not rational, but we did get the rate cuts and ‘not qe’.
graphs show wholesale inventory stocking of imports ahead of threatened tariffs last year, unwinding some of that this year..
Wolf
Can you provide the St Louis Fed symbol/code for the last chart in this piece. Production of Machinery for Oil & gas Drilling, etc.?
https://fred.stlouisfed.org/series/IPG3331S
– “Calculated Risk” has some nice charts on the US Trade Deficit from October 2019 that confirm the developments in the CASS freight index. I.e. US Trade Deficit has shrunk more in october 2019.
– Opps. I forgot to add the Calculated Risk weblink:
https://www.calculatedriskblog.com/2019/12/trade-deficit-decreased-to-472-billion.html