We have entered 2019 with some good economic indicators: jobs, wages, gross domestic product and retail sales all saw strong growth during 2018. The stock market has defied all rationale behavior in recent weeks, dropping dramatically, then regrouping and then dropping some more, but that can be laid at the door of tweets that lambasted all and sundry rather than economic fundamentals.
Even though there were some good economic indicators, the latest manufacturing Purchasing Managers Index reading of 53.8 in December, down from 55.3 the previous month, pointed to the weakest pace of expansion in the manufacturing sector since September 2017. There have been record-high levels of imports over the past several months, primarily due to raised inventories ahead of expected tariff increases. But we are projecting declining volumes in the coming months and an overall weakness in imports for the first half of the year.
This is supported by weak manufacturing output in China and the rest of Asia, where exports are beginning to decrease in the face of U.S. tariffs. China recently reported the weakest manufacturing growth in more than two years and China's PMI for October was 50.2, just above recessionary levels. The Xi government has seen that the trade war is causing it more harm than expected. The PMI’s drop adds to concerns that the world’s second-largest economy will continue its slowdown in the coming months. China’s GDP grew 6.5 percent year-over-year in the third quarter. That was nearly twice U.S. GDP growth but the weakest for China since the first quarter of 2009. China’s growth rate for the year is expected to be closer to six percent.
Consumer debt continues to rise, perhaps in anticipation of higher prices due to tariffs. Any slowdown in the economy could be sharp as efforts are made to reduce debt, and that will hit imports. The big question, of course, is timing. The impact come in the next 18 months as we are already seeing weaker import volumes.
Carriers are doing their best to manage capacity in an effort to keep freight rates – and their income – up but the optimism they held in 2018 appears to be evaporating. New capacity has been delayed but shipyards will only agree to this for a limited time. Freight rates will suffer.