Investors are still rocking their blinders on the U.S. economy.
The major indices continue to be higher year to date. There remains the logic that (1) the Fed's lack of action on rates will spur re-accelerated growth this summer; (2) the first-quarter slowdown was merely transitory, fueled by low oil prices rippling the industrial patch and hurting many other sectors. During her first day of testimony to Congress on Tuesday, Fed Chair Janet Yellen said she doesn't expect a U.S. recession. All pretty comforting indicators, no?
Sure, but getting too comfy in anything has the tendency to blow back in your face. And I think that has to be kept in mind when assessing the U.S. economy and investments in the market right now. For if you peel beneath the surface of hubris, it's easy to see the U.S. economy continues to struggle in the second quarter, which calls into question those assumptions for growth in the back half of the year. Indeed, it should make one wonder where Yellen's more cautious tone on the economy that was struck Tuesday is valid, and not just some kind of scare tactic to the bulls. At the very least, it supports the Fed's downgrade of its U.S. economic growth projections last week.
The signs of economic troubles are starting to sprout from many arenas.
First, jobs growth has decelerated into the warmer weather months. Restaurant traffic remains sluggish despite chains such as McDonald's (MCD) and Yum Brands (YUM) offering new discount menus. Corporate profit growth, at its core (excluding share repurchases), is virtually nonexistent for companies not named Facebook (FB) and Starbucks (SBUX). According to a new report from J.P. Morgan, there is now a 34% chance of a recession within 12 months. That is down slightly from 36% earlier in June, but up from 21% in January. Similar increases preceded the past three recessions, noted the investment bank. (Facebook and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
But of all the recent tells of a decline in growth sometime within the next 12 months (technically two quarters in a row of declining growth indicate recession), fresh warnings from two well-known truckers has me most concerned. If it was a single warning, maybe I would have written it off as a company-specific issue, but when two industry players toss up caution flags, it's worth monitoring. All in all, the comments don't square with the optimism on the U.S. economy at the moment.
Swift Transportation (SWFT)
June 7 mid-quarter update: "As many of you are already aware, the truckload market has been very challenging as of late. Excess capacity, excess inventories and sluggish demand put pressure on volumes and pricing in the first quarter and, unfortunately, those trends have continued through May. In March, we made the decision to downsize our core truckload fleet based on the pressures we were experiencing and have removed approximately 300 trucks through the end of May. The goal of the fleet reduction is to drive asset utilization despite the softer freight environment.
"With excess capacity still prevalent in the marketplace, the pressure on pricing has increased rather than relinquished through April and May. Depending on the customer and the lane, we have experienced everything from nominal increases, to flat, to decreases in contractual rates."
Note: The comments above were related to the company's trucking segment. Sales in its refrigerated and intermodal segments weren't anything to write home about either.
Werner Enterprises (WERN)
June 21 update: The company has slashed its outlook. Here is what it cited as the cause:
"The principal factors negatively affecting earnings per share in second quarter 2016 compared to second quarter 2015 include: (1) sluggish freight market conditions resulting in decelerating rate per total mile trends from difficult 2016 customer rate negotiations and weak spot market rates, lower miles per truck and increased empty miles, (2) the cost of driver pay increases implemented first quarter 2016 and independent contractor per mile increases in fourth quarter 2015, and (3) a soft used-truck market."
Meanwhile, total rail carloads continue to be pretty weak -- they actually continue to decelerate from already low levels.
