Ancient History: February Industrial Production and Retail Sales

This morning the Federal Reserve Board published February Industrial Production data and the U.S. Census Bureau published February Retail Sales. During normal times, this data would provide the first official pulse on the state of freight demand. These are, of course, anything but normal times. The sudden market shift over the first half of March — in response to the rapid, unprecedented, and largely unexpected spread of the COVID-19 virus around the globe — renders these normally informative monthly data a quaint relic from a very different time.

The data showed a continuation of the trends that drove freight markets during the latter half of 2019: Strong U.S. consumer demand weathered by pockets of weakness overseas, particularly in China, and in the industrial sector. China’s economy normally slows in late January and early February as the country gears up for Lunar New Year celebrations. But this year, the celebrations were tempered by the COVID-19 outbreak and output disruption continued through much of February — about four weeks longer than is normal. The country is still gradually ramping up just as the rest of the world is starting to hunker down.

Freight data have provided an early signal of what we don’t yet see in the official statistics: There has been a surge in consumer demand, particularly for essentials in the most affected parts of the United States (as is visible in this Convoy chart published in yesterday’s Wall Street Journal). What was originally a Northwest, and then West Coast, phenomenon is now nationwide. A handful of consumer staples — notably toilet paper — have emerged as symbolic goods for a country on edge. (As we noted recently, the vast majority of composite paper products such as toilet paper are manufactured in the United States.)

But even after the consumer panic subsides, the U.S. economy will have to grapple with the legacy of at least two weeks of shuttered business activity for non-grocery retail and in the leisure/hospitality sector. The urban centers that, thus far, have been hit first and hit hardest by the COVID-19 outbreak were — for much of the past decade — the most powerful drivers of U.S. economic growth and consumption. That is now on pause. 

Historically, the only sector that is consistently stable during downturns and geopolitical/public health crisis is the grocery sector. In almost every crisis, consumers have allowed themselves one luxury or another. During the most recent recession, restaurant spending continued to grow; in prior crises, lower interest rates and incentives prompted splurging on big-ticket goods.

While the rest of the country was booming last year, the freight industry was struggling in response to tougher international and industrial conditions and a soft agricultural year hamstrung by adverse weather. As our research has shown, the freight economy entered a recession in late 2018 and demand has been soft since then. Prior to COVID-19, we had expected a rebound this spring. But any momentary rebound associated with consumer stockpiling, looks likely to be short lived.

We have updated our monthly chart plotting the state of the freight economy, below.

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