Another Leading Economic Indicator

On today’s show we’re looking at another economic indicator that might signal a weakening economy. Truckers have for months been sounding the alarm about a "bloodbath" in their $800 billion industry.

This year alone, some 2,500 truck drivers have lost their jobs as trucking companies large and small declare bankruptcy. That is a small number considering the scale of the industry. However, major public carriers like J.B. Hunt, Knight-Swift, and Schneider have been forced to cut their annual outlooks.

Trucking is often looked at as a leading indicator of where the rest of the economy is headed. As 71% of America's freight is moved on trucks, companies foreseeing needing fewer trucks is typically an omen of an economic downturn: If manufacturers are producing less and people are buying less, there's less of a need to move goods.

Trucking participates in all phases of commerce, everywhere in the supply chain. It increases as manufacturing starts to ramp up, giving it leading indication on economic growth.

When the rest of America is headed for a downturn, freight usually dips first, a new published report from Convoy's economic research division said. The industry went into a recession in April 2006, more than a year before the rest of the economy was clobbered by the Great Recession, starting in January 2008.

Rail and air cargo are also suffering. Air freight has declined year-over-year for eight consecutive months, according to the International Air Transport Association. The IATA head has said the China-US trade war is dragging down business.

Fuel is a massive expense for truck drivers — and the companies that employ them. Fueling up a truck fuel costs can easily total thousands of dollars per month; truckers are driving up to 11 hours a day in vehicles that get at best 6 miles per gallon.  So, most companies give their employees gas cards to pay for the diesel fuel. Unless, of course, that company can't afford the fuel. The internet is full of stories of truckers who were laid off and their employer owed them for fuel.

In the first quarter of 2019, 100 more trucking companies failed compared to the same period in 2018.

Truckers large and small are likely to continue to feel the pain of bankruptcies. Diesel rates are expected to surge following IMO 2020, a new set of environmental standards slated to have "large and disruptive effects" on the oil and gas industry. We did a segment on the impact of new sulfur emission standards that are due to come out on January 1. If you missed that show, it was episode 462 on April 23 of this year.

According to the FreightWaves report, the surge in trucking bankruptcies has been historically linked to a jump in diesel prices. For smaller trucking companies, such increases in cost can't be passed down to their customer base of retailers and manufacturers - who can just go to a cheaper trucking company in the ultra-competitive space.

And now it appears clearer than ever that the economy is headed for a slowdown if not an outright recession. Remember, the definition of a recession is two consecutive quarters of negative growth.

Only a few years ago there was a shortage of independent truck drivers in the US, and they were being imported from India to make up the shortfall. Now that trend appears to be reversing.

On Wednesday, investors everywhere were spooked by an inverted yield curve, in which the spread between two- and 10-year Treasury yields fell below zero. We have had a few yield curve inversions over the past couple of years. They can sometimes accompany economic slowdowns, but not always.