Here’s why the Fed may be nervous about the US economy

  • With the US economy booming amid a record stock market high and relatively good employment levels, people have been asking why the Federal Reserve seems sure to cut interest rates.
  • Shipments have fallen for a seventh straight month, however, a sign the trade war with China is hammering trade.
  • The Fed may be watching the freight data.
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The US stock market is hovering near record highs, and unemployment is at a healthy 3.7%, yet the Federal Reserve looks set to cut rates as soon as this month. Why?

“There initially seems to be little reason for the Federal Reserve to be considering interest rate cuts, but a collapse in US freight traffic suggests the central bank may have cause to be nervous about the American economy after all,” said Russ Mould, an investment director at AJ Bell.

Shipments fell for the seventh straight month – the worst slump since 2016, suggesting trade tensions with China are having an effect on movement of goods.

“Investors need to pay just as much – if not more – attention to the Dow Jones Transportation index as the better-known Dow Jones Industrials average,” Mould said in a note to clients on Tuesday.

Freight shipments are dropping.

caption
Freight shipments are dropping.
source
Cass

If transport indexes are poor, then industrials ones would eventually start to struggle, and vice versa, Mould said.

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“The failure of the Dow Jones Transportation index to set new all-time highs, even as the Dow Jones Industrials does so, is therefore a trend that must be watched,” he said in a note on Tuesday. Transportation stocks are about 10% below their all-time high, he said.

Transport stocks are lagging the Dow.

caption
Transport stocks are lagging the Dow.
source
Refinitiv

So if shipments are down, Mould is suggesting that industry isn’t doing as well as it seemed.

“After all, if the Fed does start to cut interest rates, and not just once but two or three times as markets seem to expect, then surely it will be doing so because the economy is going south,” he said. ” That would be bad for American corporate profits, where growth has already slowed markedly, and that could in turn leave US stocks looking very exposed from a valuation perspective.”

Freight seems to be dropping much faster than manufacturing, and it may not be long before it catches up.

caption
Freight seems to be dropping much faster than manufacturing, and it may not be long before it catches up.
source
Cass, Institute for Supply Management, FRED – St. Louis Federal Reserve database

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Mould added: “This is exactly what happened during the 2000-03 and 2007-09 bear markets, which even frantic interest-rate cutting from the American central bank could not prevent.”

Mould did point out, however, that a trade deal between the US and China or stimulus by the White House could make the doom-and-gloom scenario less likely.