Opinion: Slowing US economy can ill afford any more shocks

The available financial and real economic data suggests the US economy is poised between continued growth at a slower rate or the onset of a recession.  Port of Long Beach photo.

US economy cannot afford any more negative shocks, including a trade war with China

By John Kemp

LONDON, Feb 19 (Reuters) – The US economy lost a lot of momentum during the fourth quarter and suffered a serious wobble in December, which should give policymakers pause before doing anything that could unsettle fragile sentiment further.

Freight movements by road, rail, air, barge and pipeline fell more than 3 per cent in December compared with November, according to the US Bureau of Transportation Statistics (BTS).

Freight shrank by the most in any one month since March 2009 and was just 1.4 per cent higher than in the same month a year earlier, the weakest performance for more than two years.

Road freight slumped more than 4 per cent in the final month of 2018, according to data sourced from the American Trucking Associations (“December 2018 freight transportation services index”, BTS, Feb. 13).

Truck freight has been losing momentum since the middle of last year but the drop in December was the worst for nearly seven years (https://tmsnrt.rs/2GVTxDc).

Separately, loaded container movements through the major gateways of Los Angeles and Long Beach slowed sharply, according to container counts from the port operators.

Faltering freight volumes are consistent with other data showing the manufacturing sector hit a soft patch towards the end of last year.

Manufacturing output hit a cycle high in October but fell in each of the three following months and was down more than 3 per cent by January (“Industrial production and capacity utilization”, Federal Reserve, Feb. 15).

Purchasing managers also reported an abrupt deceleration in the rate of expansion, with the Institute for Supply Management’s composite business activity index registering its worst decline in December since the financial crisis.

In recent months, some observers have commented on the apparent disconnect between plunging financial markets, wobbling business surveys, and solid economic data. In retrospect, however, the data is all coherent.

The drop in U.S. equity valuations and flattening of the yield curve in the fourth quarter are consistent with hard economic data showing a rapid cooling in the economy late in 2018.

What next?

The critical question is whether the slide in freight and manufacturing activity near the end of last year turns out to be a brief soft patch or heralds a more sustained period of weakness – even a recession.

Equity prices rallied strongly in January and the Institute for Supply Management’s composite activity indicator reversed some of the losses the month before, both of which suggest the economy will continue to expand.

But both remain well below their pre-October highs and the yield curve has not steepened significantly, which point to a more sustained loss of momentum and an elevated risk of recession.

Taken together, the available financial and real economic data suggests an economy poised between continued growth at a slower rate or the onset of a recession.

Like expansions, recessions are driven by positive-feedback mechanisms which amplify the effect of an initial disturbance, often quite a small one, so the next few months will be critical.

In the circumstances, the US economy can ill afford any more negative shocks, and that includes an escalation of the trade battle with China.

John Kemp is a Reuters market analyst. The views expressed are his own.

(Editing by Dale Hudson)

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