Mounting Trade Concerns Slow Supply Chains
Brace for slower economic growth. Freight volumes in the United States and around the World are falling due to escalating trade tensions and an uncertain future. Most recessions have been brought on by mistakes in some combination of fiscal, monetary or financial supervision.
Former Fed Chairman Ben Bernanke once quipped that expansions do not die of old age, they are murdered, most often because of policy mistakes. Our current problems stem from trade policy, which has turned protectionist and is attempting to remake global supply chains. Trade disagreements have heightened business uncertainty and disrupted investment plans in the U.S., Europe, and Asia.
Falling Supply Chain Traffic
Most cyclical indicators are indicating business activity flat or falling. U.S. carload Rail Freight fell 4.8% and Intermodal traffic fell 6.1% in July versus July 2018. Port of Long Beach Containerized traffic was down 9.7%. Seasonally adjusted Truck Tonnage was up 3.3% June 2019 versus June 2018 while Air Freight was down 3.62% May year over year.
Business investment is based on an ability to predict the future environment. Tariffs and investment restrictions have put the expansion in jeopardy. Policymakers have taken growth for granted but are reluctant to announce the possibility of a recession for fear of harming business and consumer confidence. It’s elevated uncertainty which is curtailing economic activity.
China’s Impact on the U.S.
China’s efforts to boost the development of indigenous innovation and technology has resulted in greater intervention by the Chinese Communist Party (subsidies, trade and investment barriers, and discriminatory policies) which negatively impact U.S. intellectual property and technology intensive firms.
China’s goal? To turn Chinese enterprises into world-class globally competitive firms.
The problem? A lack of a relative rule of law in China, widespread government corruption, financial speculation, and misallocation of investment funds. Government connections, not market forces are the main determinant of successful firms in China.
In China, rules and regulations are not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected (due to the lack of an independent judicial system).
The Resolve of the American Economy
Before their August recess, Congress passed a major budget bill that suspended the debt limit through July 31, 2021. Government debt takes dollars out of the economy, reducing private investment and slowing economic growth. The larger the debt the more likely you’ll question the Government’s ability to pay back borrowed funds.
Cutting spending would reduce GDP. Raising taxes would slow growth. Our Political Parties are conflicted. Yet America remains the safest economy in the world. It has the largest free-market economy and its currency is the World’s reserve currency. As investors purchase U.S. Treasuries in a flight to safety, they bid up the price, causing interest rates to decrease and the yield curve to invert. A question is how will the administration respond as the 2020 presidential election nears?
Despite the risk, transportation equipment investors need to build for the future, develop talent, and grow their investment business. Weaker demand will reduce asset prices. To navigate uncertain markets the best defense is to be as well informed as possible.
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