Our Recession Risk Dashboard continues to signal that the likelihood of a pullback in the next 12 months is low -- a view supported by recent data on the volume of freight shipped via trucks.
The ClearBridge Recession Risk Dashboard, our proprietary gauge of current economic conditions, remained largely positive at the end of April. The dashboard is organized along the four key fault lines of our economy: consumer health, business activity, inflation and financial markets. During April, several indicators moved higher and others lower, but none were substantial enough to warrant a change in signal from the end of the first quarter. Profit margins, however, maintain a caution signal, reflecting a pickup in sales and potential benefits from tax reform.
Source: ClearBridge Investments
Freight Volumes Correlate with Economic Health
Over 70% of freight moved in the U.S. (10.5 billion tons per year) goes on a truck, according to the American Trucking Association. Even freight moved by rail, ship, or plane typically travels via truck on the way to/from the railyard or airport. As a result, the amount of freight moved by truck provides a timely reading on the health of the economy. When growth accelerates, a greater amount of freight is shipped and truck tonnage rises. Conversely, truck tonnage typically falls as GDP contracts. The metric we evaluate captures data from trucking fleets both large and small across the country.
Historically, truck shipments tend to turn lower well ahead of a recession, ultimately falling by 10% or more as the economy cools off. We look for a dip in truck shipments of 0% to 5% (year-over-year growth) as a cautionary signal for our dashboard, and a fall in truck shipments of more than 5% to signal an impending recession. On average, the caution signal has come 13 months ahead of a recession, with a drop of more than 5% occurring four months later (nine months before the start of a recession) as indicated by the circles in the chart below. Put differently, truck shipments have provided investors with meaningful warning ahead of past economic contractions.
Truck shipment growth has been increasing on a year-over-year (YOY) basis, with YOY improvement of 5% or more in each of the last seven months. This pickup in freight activity is consistent with an expanding economy, and the signal is solidly in the green.
Truck Tonnage Growth (Year-over-Year)
As of March 30, 2018. Source: American Trucking Association, Bloomberg
Truck shipments have not had a perfect track record, however, suggesting caution in 1985/1986 and again in 1996. While both periods coincided with slower GDP, it’s important to note that no recessionary indicator is perfect. That’s why we incorporate 12 variables into the ClearBridge dashboard, measuring very different parts of the economy, to help see past false alarms for any individual indicator.
As our economy continues to evolve, so too will our recessionary dashboard and the signals we incorporate. For example, new regulations regarding electronic logging devices (ELDs) went into effect in February and are likely to raise the cost of truck shipping in the near term. However, volumes (tonnage) should see less of an impact, according to our industry analysts. We will pay close attention to any impact on trucking volumes from the ELD mandate, autonomous vehicles, and other changes and continue to work closely with our industry analysts to leverage their expertise. At the end of the day, freight must continue to be delivered across the country, making this indicator an important component of our dashboard in the years to come.