Weekly Economic Release Summary - Did The New Panama Canal Locks Affect USA Transport Analysis?

On 26 June 2016, the new larger locks were opened in the Panama Canal. These new locks not only doubled the capacity of the canal, but also raised the maximum ship size from 110 ft wide, 1,050 ft long, and 41.2 ft deep to 180 ft wide, 1,400 ft long, and 60 ft deep.

According to the Financial Times, These new locks allow for an estimated 79% of all cargo-carrying vessels to transit the canal - up from 45%.

It is no secret that I believe transport data is both a forecaster and validator of economic direction. And transport movements have slowed (indicating a slowing economy) since the beginning of 2019.

A recent Seeking Alpha post suggests that the widened Panama Canal is changing freight patterns, resulting in less rail traffic and more trucking. This post concludes:

The bottom line is that the widening of the Panama Canal is almost certainly driving a secular shift on domestic US freight patterns, as more seaport traffic goes to the East Coast followed by truck shipments vs. West Coast ports and then cross-country by rail.

The remaining question is, what are we to make of the decline in *total* freight volumes in the Cass Report? On the one hand, because the effect showed up in trucking vs. rail almost immediately, beginning in 2017, by now YoY comparisons in total traffic should not be distorted by the shift. On the other hand, cutting out the rail leg in transportation is a net loss to the total, although again, that presumably would have been true a year ago as well.

In short, the YoY total freight statistics from the Cass Freight report — down YoY beginning in December — argue that tariffs have had a significant negative effect, after several months of "front-loading," although they may be overstating the effect to the extent that the secular shift in domestic freight patterns brought about by the widening of the Panama Canal is still ongoing.

Of course, everything - including tariffs and the Panama Canal widening - affects the distribution system. The following graphic should clear up the effects of container movements due to the widening of the Panama Canal.

In short, it is difficult to see any noticeable effect of the widening of the Panama Canal on sea container imports. My take on the current state of logistics:

Evolution Vs. Revolution - From my logistics management background, supply chain modification has been going on since the beginning of time. Logistics engineers use quantitative analysis to design and build the infrastructure. The inputs to this analysis include labor (costs and availability), taxation, land costs, final users, energy, building costs, time elements, subsuppliers/sub-shippers, etc. Elements in this quantitative analysis change continuously - but the investment is made, there is little one can do when it becomes uncompetitive except to shut it down. It is evident that the infrastructure for the movement of goods changes only gradually. A new potential supply route effects are evolutionary - and usually, take decades to fully implement. The transport system does not change overnight. After all, the Panama Canal is not free - and there are other ways to move goods by sea without using the Panama Canal.

Economic Shocks - This is when something happens that immediately affects logistics. Usually, this occurs due to wars (like the Gulf War completely disrupted sea transport in the Atlantic, Med, and Indian Oceans), supply disruptions (like the Arab oil embargo), major disasters, and some argue that the tariffs with China. The opening of the Panama Canal in 2016 cannot be an economic shock that delayed its effect for two years to the beginning of this year.

The bottom line is that transport growth has been soft this year, and mirrors the softness seen in most economic sectors. It is illogical to assume there is a disconnect between the economy and the transport sector.

Economic Releases This Past Week

The Econintersect Economic Index for April 2019 insignificantly improved but remains below territory associated with normal expansions. Even with this improvement, the question remains whether this long term downward trend will continue. Note, our index is built on data sets which were not affected by the government shutdown - and it is most likely that other economic forecasts you have seen fudged the missing data.

The following table summarizes the more significant economic releases this past week. For more detailed analysis - please visit our landing page which provides links to our complete analyses.

Economic Release Summary For This Week

ReleasePotential Economic ImpactComment
March Chicago Fed National Activity Indexindicates a soft economy

The economy's rate of growth declined based on the Chicago Fed National Activity Index (CFNAI) 3 month moving (3MA) average - and the economy remained below the historical trend rate of growth.

The single month index which is not used for economic forecasting, and unfortunately is what the CFNAI headlines. Economic predictions are based on the 3-month moving average. The single month index historically is very noisy and the 3-month moving average would be the way to view this index in any event.

March Existing Home Salesn/a

The headline existing home sales declined relative to last month with the authors saying "It is not surprising to see a retreat after a powerful surge in sales in the prior month. Still, current sales activity is underperforming in relation to the strength in the jobs markets."

The rolling averages for existing home sales have been slowing since the beginning of 2017. This month the rolling averages remained in contraction - but improved. Housing inventory is historically low for Marchs and the year-over-year growth slowed. Keep in mind that sales are contracting year-over-year.

March New Home Salesindicates an improving economy

The headlines say new home sales significantly improved. Median and average sales prices declined.

  • unadjusted sales growth decelerated by 0.7 % month-over-month.
  • unadjusted year-over-year sales were 3.0 % year-over-year.
  • the three-month unadjusted trend rate of growth accelerated 5.9 % month-over-month - is up 1.8 % year-over-year.

March Durable Goodssoft growth

The headlines say the durable goods new orders increased. Our analysis shows the rolling averages continued its decline.

In the adjusted data, the strength was defense and civilian aircraft. This series has wide swings monthly so our primary metric is the unadjusted three-month rolling average - which declined. The rate of growth of the rolling averages is below the values seen over the last year.

Note that inflation-adjusted new orders are in contraction this month..

1Q2019 Real GDPincrease in growth

The advance estimate of fourth quarter 2018 Real Gross Domestic Product (GDP) is a positive 3.2 %. This growth is better than the previous quarter's 2.2 % if one looks at quarter-over-quarter headline growth. Year-over-year growth also improved modestly so one could also say economic growth was better.

0.7 % of this 3.2 % growth number is attributable to inventory growth (materials manufactured but not yet sold). Consumer spending was weak. The strength in this report is the trade balance not being a drag on GDP.

  • consumption for goods and services improved adding 0.8 % to GDP.
  • trade balance improved adding 1.0 % to GDP
  • inventory change added 0.7 % to GDP
  • fixed investment added 0.3 % to GDP
  • government spending added 0.4 % to GDP

Little in this data release indicates improvement on Main Street.

Surveysgenerally lower

Richmond Fed Manufacturing - The market expectations from Econoday was +10 to +13 (consensus +12). The actual survey value was +3. The important Richmond Fed subcategories (new orders and unfilled orders) declined and are in contraction. This survey was much weaker compared to last month.

Kansas City Manufacturing - Kansas City Fed manufacturing has been one of the more stable districts and their index even though at the lower end of the range seen in the last 12 months. Note that the key internals were mixed with new orders in expansion and backlog back in contraction. This is a worse report than last month. Market expectations from Econoday were 10 to 13 (consensus 10). The reported value was 5. Any value below zero is in contraction.

Michigan Consumer Sentiment - The final University of Michigan Consumer Sentiment for April came in at 97.2 - up from the preliminary of 96.9, and down from the March final of 98.4.

Weekly Rail CountsDefinitely not positive news

Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy

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