March Factory Output Came in Like a Lion and Went Out Like a Lamb

For the U.S. industrial sector and freight industry March was true to its reputation: It came in like a lion and went out like a lamb. After showing modest signs of a rebound during the early months of Q1, freight demand fell to its lowest level in 3.5 years.

The start and end of March felt like two very different months for nondurable goods manufacturers — one reason why the decline wasn’t as sharp as we have seen in other March data such as retail sales or employment. If the factory output data were available at a higher frequency than the official monthly data, March would look like an EKG: Way up and then way down (which we see in Convoy’s truck tender data). During the first half of the month, factories were running well above normal capacity rushing to meet the panic-induced surge in demand for consumer goods. Then it stopped. Activity dipped as consumers retrenched.

For durable goods manufacturers, the month was more linear — a gradual descent into the abyss, retreating from high expectations during the first two months of Q1. Discretionary consumer spending on big-ticket items like cars and electronics, and business-fixed investment, are typically among the first line items to be cut when budgets tighten. Industrial output of business equipment declined by 13 percent annually, twice the headline pace. Supply-side constraints associated with stay-at-home orders compounded that shift in March.

Capacity utilization for food and beverage manufacturers was already hovering just barely above all-time lows and the shutdown of the food service/restaurant supply chain dragged it down. Expanding safety precautions at food processing plants mean that April numbers are likely to be worse. Utilization among paper goods manufacturers was also lower, but not far outside its historical range.

Retail sales data published this morning by the U.S. Census Bureau also showed a sharp decline in March — the sharpest month-over-month decline on record since the data begin in the early 1990s, though a smaller annual decline than in October 2008. Restaurant sales fell by 26 percent ($17.5 billion) from February while grocery store sales increased by 27 percent ($15.7 billion). Some caution is necessary in interpreting the official retail sales numbers since they exclude online sales which increased.

After a year plus of soft freight demand, coming into 2020 expectations were high (at least among some carriers) that freight markets would pick up. The COVID-19 pandemic has derailed those hopes. The freight recession that began in late 2018 continued into March 2020 according to Convoy’s freight-weighted industrial production index, with the index reversing modest gains in recent months and falling to its lowest level since fall 2016. Judging from the first half of April, it will continue into Q2.

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