Economic Briefing

At the time of writing, 25% tariffs on Canada and Mexico were on hold for thirty days pending negotiations and some actions that were going to be taken by both Canada and Mexico in response to Trump Administration demands. China has taken an additional 10% increase in tariffs and has retaliated with a set of specific 15% tariffs on some products and tighter quotas on exports of certain materials used in the US manufacturing sector. Given that conditions are changing so quickly (daily and hourly at times), it does not make sense to try and cover all of the various products that got hit with tariffs.

But on a fundamental basis, there are a couple of conceptual points that are worth considering. First, in the 2018-2019 tariff period, inflation only moved from 1.7% to 1.9% at the time. Granted, conditions were different at the time and the country had not gone through any significant inflationary period in nearly 11 years. Second, the USTR issued more than 18,200 exclusions to tariffs in that period (more than 55,000 were filed for and the rate that exclusions were granted was 35%).
The Trump Administration has also mentioned tariffs that could be imposed on the BRIC nations and the EU, although specifics have not yet been announced (at the time of writing).

In the prior term, tariffs did not change freight volumes in any significant manner. Trade continued between the US and its trading partners abroad. Given that some of the global supply chain was already shifting sourcing will make comparisons difficult (to know what is tariff-induced vs. part of the broader supply chain sourcing diversification trend).

Over the past five years, manufacturing construction activity is 195.1% higher than it was just prior to the pandemic. This is an average annual growth rate of 24% and even when stripping out the impact of inflation, annual growth in manufacturing construction was still more than 18% annually.

This trend started in earnest just after the 2020 lockdown period. Companies that had been planning to reshore portions of their manufacturing processes accelerated that investment in the 2021-2024 period. But many of those assembly lines are just now starting to come to life and create output. Over the next two years, much of the trillion dollars of reshoring construction activity will start releasing real output. This new volume of products will start to impact local trade lanes and in areas where the volumes are strong enough, could change some of the national distribution volumes.

Under the new Trump Administration, this trend is expected to accelerate in the coming 12-48 months, and many firms will be looking at getting these assembly lines creating output as quickly as possible (especially with the threat of tariffs).

Impacting both the transportation sector and manufacturing, the latest Purchasing Manager’s Index (PMI) from both the Institute for Supply Management and S&P Global showed improvement in January. The S&P Global PMI came in at 51.2, firmly in expansion and much higher than the 49.4 posted in December. New orders were slightly improved, but S&P Global reported that manufacturer optimism was at its highest level in more than five years and the month-over-month change in optimism between December and January was the sharpest in the history of the survey.

ISM reported that its PMI jumped to 50.9, up from 49.2 in December. New orders were sharply higher and both manufacturers and their customers reported that inventories were still “too low”.

That combination of stronger output, fewer backlogs, strong new order books, and solid production capacity likely means that there will be potential for stronger freight volumes in the months to come.