Bill Witte issued a trigger warning before his slides on FTR’s State of Freight webinar Thursday.
“You have to give people trigger warnings when you say things people might find disturbing,” said the FTR economist. “Here’s a trigger warning.”
The news wasn’t good. Perhaps the most hopeful part of the Witte’s forecast was it might be wrong.
“The situation here is unprecedented,” Witte says. He compares current economic uncertainty to the pandemic, but even that isn’t apples to apples. Whereas the pandemic was an organic situation, the tumult today is economic policy and deliberate action from Washington, D.C. Just like no one knew how the pandemic would unfold, no one knows the exact timing of President Donald J. Trump’s policies or the policy itself.
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“We don’t have the ability to figure it out, even if we knew exactly how the policy is going to unfold, how it’s going to work through the economy,” Witte says.
FTR Vice President for Trucking Avery Vise says FTR assumes a 21% global tariff, but the potential impact could be even more. That tariff will almost certainly drive up prices, which has cut the company’s assumption the Fed will cut rates four times this year down to two.
“But I don’t know that there’s any guarantee of that,” Vise says.
First-quarter numbers did look promising as businesses stocked up on inventory ahead of tariffs. In March, Ireland was a bigger importer of goods into the U.S. than China, “which is phenomenal,” Vise says. Ireland makes a lot of pharmaceutical products for U.S. markets.
Automotive buying also saw spikes as consumers tried to get ahead of higher prices, and more companies invested in equipment — a 23% jump quarter-over-quarter.
“This is almost certainly a pre-buy effect due to tariffs,” Vise says.
On the flip side, Vise says FTR expects residential investment, including housing starts and spending on renovations, to be lower as mortgage rates remain elevated. Also lower: gross domestic product (GDP). Forecasts prior to tariff announcements were fairly steady, but FTR lowered them considerably since.
“You can see a pretty big impact,” Vise says, even though there was a payback from lower imports.
Industrial production forecasts have been lowered as well, going negative for a few quarters but returning to slightly positive next year, but still not as strong as previously forecast.
“We’re looking at almost a uniformly negative environment relative to where we would’ve been prior to the tariff imposition,” Vise says.
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Witte says employment so far has been holding up. But that won’t continue. He says job losses could reach 100,000 per month for a number of months. Labor numbers typically fall slightly after other indicators, Witte says, as firms try to hold on to employees as long as they can. One of the dangers, he says, is if the labor market deteriorates more than expected, which could send the economy into a spiral.
“Uncertainty becomes a negative force,” Witte says. “It paralyzes people. If you don’t know what’s going to happen, you can’t make rational decisions.”
Soft data, such as from surveys, is increasingly negative, Witte says.
The National Association of Wholesaler-Distributors (NAW) released a survey recently that shows a third of distributors are already facing price hikes of 25% or more. More than 60% of distributors expect the cost of their goods to rise by 10% or more this year and almost 70% are reporting a negative effect on their business.
“We urge President Trump to secure trade agreements quickly to restore certainty, help businesses plan and ease supply chain pressures,” says Eric Hoplin, CEO of NAW.
Much uncertainty comes not just from the unprecedented nature of these tariffs, but also from the lack of clarity around the policies. Tariffs were announced, went to effect, were rolled back, were raised and lowered and issued in new ways and without the usual level of detail, leading to confusion in the market.
When 25% tariffs were initially issued on automotives and automotive parts, it was initially unclear if it covered heavy-duty and medium-duty commercial vehicles and parts. However, an executive order issued last week — weeks after the initial executive order — creates a new mechanism to reduce levies on vehicles that undergo final assembly in the U.S. Manufacturers would be eligible for an import adjustment offset amount that would offer some relief from price hikes.
MEMA, the Vehicle Suppliers Association, says it is committed to ensuring vehicle suppliers, one of the largest sectors of manufacturing jobs in the United States, has “a strong, stable foundation from which to grow, invest and innovate.”
Twenty years-plus of globalization means supply chains are now very efficient and the result of any rearranging by the Trump administration will result in “something that is less efficient,” Witte warns.
Another surprise effect may be what happens to the dollar. Witte says basic macro theory states when a country imposes tariffs in an attempt to reduce a trade deficit, the country’s currency should rise in value as the markets shift. Less trade means fewer dollars in the global market equals more valuable dollars, right? Not necessarily.
“The dollar has been falling in value,” Witte says. “And that’s troubling. You have a loss of confidence in the dollar and the U.S. financial system. That’s one of the largest advantages the U.S. has in relationship to the rest of the world."
