Economic Briefing
Tariff Update
At the time of writing a Federal Court had ruled that the reciprocal tariffs imposed by the Trump Administration under the International Emergency Economic Powers Act of 1977 were illegal and ordered the immediate reversal of those orders. The ruling was being appealed and will likely end up at the Supreme Court. At this time, there was not enough information to change the tariff landscape. If anything, it was adding more uncertainty at the time.
In other news, the first trade “deal” was announced in May, and it was the UK that claimed the headline trade agreement. Reportedly, 17 more trade agreements with the US’ top trading partners will follow this one between now and the early part of July. The remaining 110 countries will likely see a base tariff applied, but no specific time will be taken to strike specific trade agreements. There are two key components in these trade agreements, namely tariff negotiations and removal of non-tariff trade barriers. In the tentative agreement with the UK, a 10% base tariff will be imposed on many UK products being exported to the US. Exclusions are currently being granted to steel and aluminum among other items. But it appears that this 10% base tariff could be the standard applied to all trade partners (a universal base tariff).
Non-tariff trade barrier components could increase US exports to the UK by an estimated $23 billion and generate $6 billion in tariff tax income for the US. But the impact on most prices in the US is estimated to be less than 2.3% to 2.5% after currency exchange differences, discounting, and absorption up and down the supply chain. Sectors mentioned in the trade agreement that should see expanded trade activity between the two countries include agriculture, defense, high-tech, pharma, chemicals, industrial supplies, and machinery. In addition, the countries will streamline logistics and customs procedures to speed up trade and increase efficiency.
This initial trade agreement was perhaps the easiest among the 18 countries that are expected to get specific bilateral “deals”. The US has a trade surplus with the UK, and it is one of the US’ top allies, with deep integrated ties in intelligence and defense sectors. The first trade deal struck with a partner that has a trade deficit with the US will provide a more accurate blueprint for what the remaining 17 trade agreements could look like. Again, the administration expects to have most tentative agreements secured by July 7th or shortly thereafter.
Q2 GDP Currently Running Ahead of Expectations
The Atlanta Federal Reserve is currently showing Q2 GDP growing at a 2.2% rate of growth. This is well ahead of expectations for growth of just 1.0% in the quarter. Stronger consumer spending activity and corporate investment in technology and automation continue to be key drivers of growth. That is currently being offset by weaker housing market and a trade deficit (which detracts from GDP).
GDP could continue to adjust in the coming weeks as new data from the quarter is processed. This stronger GDP reading will give the Federal Reserve sufficient reasons to continue to pause on interest rate reductions. Concerns over tariff-induced inflation on the negative side of the equation and positive signs in macroeconomic growth, a stable job market, above average wage growth, and prospects for faster growth in the future are likely to keep it on pause.
Short term borrowing rates for automobiles, credit cards, and other short-term instruments will continue to be higher. And with the bond market moving in opposite direction to the Federal Reserve, key 5- and 10-year interest rates also remain high. Five year bond rates affect corporate investment and spending and the 10 year US Treasury is keeping mortgage rates higher.
The China Container Wave
US ports are likely to go through a “feast and famine” experience over the next several weeks. There was a 59% drop in container bookings scheduled to be hitting US ports by the middle of June. But in the wake of the announcement in early May of the reduction in tariffs between the US and China for 90 days is creating a surge in outbound freight. According to Vizion, bookings outbound from China to the US were up 70.6% W/W during the week of May 5th and 157.6% higher the week of May 12th. On a year-over-year basis, these rates are 28.4% higher in the latest week. Given the timing of these inbound shipments, they should arrive in mid to late June.
The cause of this wave of shipments is interesting. Many purchasing managers had “shipping ready” orders placed with Chinese manufacturers and when surprise reciprocal tariffs hit in early April, those shipments were delayed, and many were put into temporary storage in China. Upon the announcement that tariffs would be reduced to 30% for 90 days, many purchasing managers immediately had those shipments released to try and beat potentially higher tariffs at the end of this negotiating period. Maritime capacity was diverted to other regions of the globe and some reported ship capacity shortages showed in the last few weeks.
From a pricing perspective, Drewry is showing the container spot rate reacting slowly, rising by just 2% week-over-week through May 25th on Shanghai to LA routes and they are up 4% on Shanghai to New York lanes. Year-over-year, rates are still well below last year’s levels for this time of the year. Rates are still 39% and 30% lower respectively. That could change as capacity is absorbed in the coming weeks.
After this initial wave of ‘shipment ready’ products are sent outbound, questions remain about future order volumes. Surveys suggest that many purchasing managers are still taking a wait-and-see approach to future new orders and are basing their orders more on demand dynamics than tariff avoidance, and this surge of inbound containers that will hit in the next 4-6 weeks could be a short-lived wave.
Inside This Edition
Q2 GDP Currently Running Ahead of Expectations
The Atlanta Federal Reserve is currently showing Q2 GDP growing at a 2.2% rate of growth. This is well ahead of expectations for growth of just 1.0% in the quarter.
The China Container Wave
US ports are likely to go through a “feast and famine” experience over the next several weeks. There was a 59% drop in container bookings scheduled to be hitting US ports by the middle of June.
Trucking Producer Prices Surprise to the Upside in April
Trucking prices collected in the Producer Price Index from April (the latest available) show some strength. Less-than-truckload rates were higher by 4.9% year-over-year and remain at the upper end of their historical range (despite being flat month-over-month).
Fuel Prices Hold Steady While Oil Potentially Could Dive
Fuel prices have a material impact on shipping costs, and the outlook for diesel is unexpectedly flat, despite what is expected to be a sharp drop in global oil prices over the next year.
Transportation Briefing
Trucking Producer Prices Surprise to the Upside in April
Trucking prices collected in the Producer Price Index from April (the latest available) show some strength. Less-than-truckload rates were higher by 4.9% year-over-year and remain at the upper end of their historical range (despite being flat month-over-month). Many LTL firms reported that they were keeping pricing firm despite softening demand amid increases in short filling of new orders (pallets instead of full trailers) and e-commerce sales that jumped by 7.5% Y/Y in April.
Full truckload prices on the other hand slowed between March and April, falling by a marginal 0.5%. However, they were marginally higher vs. April of 2024, rising by a modest 0.6% Y/Y. The sector was still looking for direction and feeling the impact of tariffs and slowing of the general freight sector in April.
This matches the experience released by DAT Trendlines in its Mid-May report, showing truckload spot prices rising by 0.5% Y/Y but weaker by 0.5% between March and April. Load-to-truck ratios were increasing and are now running well ahead of 2023 and 2024 levels – which could signal that some shipping price inflation could hit in the coming weeks. Some sources were showing a net reduction of approximately 7,400 firms in March, which is slightly ahead of historical levels. Capacity can be added quickly in the truckload sector, but the volatility will be noticeable if the inbound wave of freight coming in June is as large as many expect.
Fuel Prices Hold Steady While Oil Potentially Could Dive
Fuel prices have a material impact on shipping costs, and the outlook for diesel is unexpectedly flat, despite what is expected to be a sharp drop in global oil prices over the next year. Diesel prices are currently 8.4% lower than they were a year ago, but the forecast shows them staying in their current range through the remainder of 2025 and much of 2026. A lack of refining capacity and global shortages of diesel in some markets could encourage US exports of refined fuel. Current prices are $3.54 a gallon nationally and are expected to average $3.49 for the full year and remain rangebound at $3.54 next year.
However, crude oil accounts for 46% of the price of a gallon of diesel and prices for crude oil are currently $62.65 at the time of writing. Crude oil prices for 2025 are expected to be $61.81 and then fall to as low as $54.00 by the end of next year with a full year average of $55.24.
Again, even with this expected reduction in crude oil prices, diesel prices are expected to remain rangebound with no dramatic changes up or down. Negotiations with Iran and any progress on a cease-fire in Ukraine would potentially help push prices down further if sanctions are lifted on Iranian and Russian petroleum products.