There isn’t much to write about today as earnings results were relatively uneventful. However, my interest was sparked by two headlines on Bloomberg. The headlines read, “Fed’s Fischer Warns of Risk to Running Too High-Pressure Economy,” and “Fed’s Rosengren Says Economy Already Headed for Hot Labor Market.” I remain confused as to why members of the Federal Reserve are suddenly concerned about the possibility of an overheating economy. I continue to ask, what industry is close to overheating? If the economy was overheating, wouldn’t we see signs of it in the transportation industry?
Although it’s early, initial results from transportation companies suggest the economy remains stagnant. While CSX won the earnings estimate game, similar to Q2, their business reported weak volume growth with seven out of nine divisions reporting declines. Specifically, volume growth fell -8% with declines in agricultural and food, chemicals, metals and equipment, minerals, forest products, coal, and intermodal. J.B. Hunt Transport Services (JBHT) actually lost the earnings estimate game today and called customer demand “tepid”. And finally, Covenant Transportation (CVTI) preannounced poor results last week and now expects EPS to be $0.12 to $0.17 versus $0.42 last year. As it relates to demand, the company reported, “Average freight revenue per tractor declined 1.2%, due to a weaker truckload freight environment.” Earnings were also hurt due to the soft used truck market as Covenant lowered the salvage value of its trucks, resulting in higher depreciation expense.
As I’m writing this post, a headline just scrolled across Bloomberg, “Ford to Idle Four Factories Due to Slowing Demand.” More overheating? From a bottom-up perspective, the economy does not appear to be overheating. I continue to believe Q3 earnings reports, on average, will not differ meaningfully from Q2. Considering Q2 earnings were weak, my views should not be interpreted as an expectation of a strengthening economy. In fact, assuming my earnings outlook is accurate, economic activity in Q3 should also be similar to Q2 – slow, and definitely not hot. Fed members must see something I don’t.
What evidence does the Federal Reserve have that has caused several Fed members to suddenly be concerned about an overheating economy? It must be select government data, because company operating results do not support the notion of a strong economy. And no, Netflix “operating around break-even for the rest of 2016” should not be considered overwhelming evidence that the economy is running too hot. However, binge watching Netflix could very well help explain the stubborn decline in U.S. productivity!