Economic Briefing
USMCA Manufacturing Slips in August
Manufacturing activity in the US, Mexico, and Canada (USMCA) markets continued to be weaker in August, surprising some analysts. The US came in at 47.9 points, down from 49.6 last month and deeper into contraction territory according to S&P Global. New orders were reportedly softer and business inventories at a manufacturing level were gaining momentum.
The remaining USMCA markets were also weaker. Mexico showed a drop of 1.1 point to 48.5 in August, down from 49.6 last month and also firmly in contraction. Mexico relies heavily on demand from the US markets and with industrial production, manufacturing, and some intermediate wholesalers seeing soft demand, it affects Mexican manufacturing demand.
Canada data was impacted last month by the impact of a short rail strike. Companies had to build inventories early to avoid potential shortfalls of merchandise if a strike had lasted longer (and rail firms stopped taking certain freight prior to the potential disruption in service) which also impacted manufacturing demand. Manufacturers in Canada reported an increase of 1.7 points between July and August and its PMI came in at 49.5, just under contraction. But as supply chain backlogs clear, Canada is likely to fall in-line with US and Mexico volumes.
Oil and Diesel Prices Continue to Fall Despite Global Instability
This seems like an identical article from last month, but the trend continued for oil and diesel prices to come down over the month. West Texas Intermediate (WTI) fell below $70 a barrel in early September trading. That was down from $73.52 a month ago and at the lowest rate since December of last year.
Diesel prices have also fallen with a drop in oil prices. Diesel prices were $3.69 a gallon, 17% lower than prices a year ago. This year’s hurricane season has not had the impact on the Gulf region and refinery activity as was expected early on, and inventories have been able to keep pace with current demand.
All eyes are still on the Middle East in reference to oil prices and supply. Tankers are still being largely diverted around the Red Sea region, which drives the price of transportation higher. Recent attacks on tankers have also created some additional risk for insurers, which is further reinforcing transit diversions in the near term. But further afield of this, analysts are closely watching the situation between Iran and Israel and potential spillover risk spreading to the Strait of Hormuz. If fighting were to spill over into Iran, it could threaten oil transits through the Strait, which could pull as much as 14 million barrels a day of oil out of the global market (oil that is not easily diverted over land from land-locked countries). For now, speculators do not seem concerned about the potential for an expanded conflict, but this can change quickly.
Aside from that Black Swan event risk, oil supply is well balanced with demand and prices remain subdued.
Interest Rates, the Fed and Supply Chain Activity
The Federal Reserve is expected to trim interest rates by at least one-quarter point in September. According to Fed minutes, the body may then follow-up that cut by another one by December and then at least a full point cut in 2025 if economic conditions warrant. Although historical data has shown a slow impact from Fed rate cuts, this time could be slightly different.
Many new construction projects have been placed on hold over the past six months awaiting the potential for an interest rate cut. The AIA/Deltek Architecture Billings Index (ABI) showed an index of 48.2 (which suggests that new project plans are contracting with a reading below 50). Firms were showing that billings were still down in July (latest available), but the number of “inquiries” was increasing at a faster pace. This suggests that new construction projects could pick up momentum quickly.
Mortgage rates have dropped in recent weeks as US Treasury rates drop, and consumers have jumped off of the sidelines. Mortgage refinance data shows nearly a 95% increase in refinance activity in the early weeks of September vs. late August.
For transportation, a stronger construction market works as a double-edged sword. It increases demand for freight and product movement, but also is the number one competitor for CDL drivers (therefore it tightens capacity). This will be a factor to watch if the Fed does indeed follow through on rate cut indications.
Inside This Edition
Oil and Diesel Prices Continue to Fall Despite Global Instability
This seems like an identical article from last month, but the trend continued for oil and diesel prices to come down over the month.
Interest Rates, the Fed and Supply Chain Activity
The Federal Reserve is expected to trim interest rates by at least one-quarter point in September.
Transportation and Warehousing Job Openings Continue to Fall
The latest data available on job openings show the transportation and warehousing sector with 312,000 jobs open through July.
USMX and ILA East Coast Port Negotiations: Talks Stalled
As mentioned, each month, contract talks between the port operators represented by the USMX and the union representing workers under the ILA are still trying to come to an agreement on a new contract to head off potential work disruptions at the nation’s East Coast and Gulf ports that could come as early as October 1st.
Container Rates Declining 3% Week over Week in Early September
Rates were still finding some softening headed into the peak retail shipping season, but they remain high on a historical basis and are much higher than last year.
Transportation Briefing
Transportation and Warehousing Job Openings Continue to Fall
The latest data available on job openings show the transportation and warehousing sector with 312,000 jobs open through July. For perspective, the same volume in 2019 was 288,000 but that surged to 356,000 by October of that year.
Versus last year at this time, job openings were down 36.2% Y/Y and 18.1% down in just the past 30 days. Again, some seasonality could be at play. Between June and July of 2019, openings fell by 15.7%, but in 2023 they jumped between June and July by 14.5%. So it is difficult to draw too many conclusions from a single data point.
The bigger factor to watch is the precipitous decline and drop of nearly 160,000 jobs in the past 12 months. Survey respondents suggest that wages are still elevated, rising by 4.3% Y/Y in the sector through July.
USMX and ILA East Coast Port Negotiations: Talks Stalled
As mentioned, each month, contract talks between the port operators represented by the USMX and the union representing workers under the ILA are still trying to come to an agreement on a new contract to head off potential work disruptions at the nation’s East Coast and Gulf ports that could come as early as October 1st. The contract covers more than 14,500 port workers under the Master Contract with some estimates suggesting that it could impact as many as 25,000 including local unions.
The latest statement by the USMX follows:
“Last week, the ILA and USMX each filed a Notice to Mediation Agencies (Form F-7) with the Federal Mediation & Conciliation Service (FMCS). The purpose of filing these notices is to inform the FMCS of a dispute between the parties, and they do not represent an agreement for mediation. USMX has still been unable to secure a meeting with the ILA to resume negotiations on a new Master Contract. USMX continues to meet with its members in preparation for the resumption of negotiations, and it remains committed to working with the ILA leadership on a new agreement.”
Container Rates Declining 3% Week over Week in Early September
Rates were still finding some softening headed into the peak retail shipping season, but they remain high on a historical basis and are much higher than last year. Drewry reported that lanes between Asia and the US were on average down 2% (whether hitting east or west coast ports). But lanes between Shanghai and LA were still up 182% Y/Y with a per container rate of $6,248 (40-FT container). Backhaul lane prices were down 15% Y/Y.
Rates between Shanghai and New York were up 150% Y/Y even as shippers began to become concerned about potential late season disruptions along the US east coast. Shanghai to New York container rates were approaching $8,591 per FEU.
For comparison, rates between Asia and Europe are generally worse. Rates between Shanghai and Rotterdam were 346% higher Y/Y. The Red Sea situation continues to be the primary factor driving prices higher. Global demand is actually weaker than expected, but the Red Sea disruption and diversion of maritime ships likely stripped as much as 20% of global capacity out of the system (a function of freight being on water longer). That factor is what has pushed prices higher. At this point, it looks like the Red Sea situation could be long in duration, carriers are asking shippers not to look for easing of capacity pressure for at least a year or more.
