By John Mauldin
Last month, the Fed joined its global peers and turned decisively dovish.
Jerome Powell and friends haven’t just stopped tightening. Soon they will begin actively easing by reinvesting the Fed’s maturing mortgage bonds into Treasury securities.
It’s not exactly “Quantitative Easing I, II, and III,” but it will have some of the same effects.
Why are they doing this?
One theory is that Powell simply caved to Wall Street pressure. But that doesn’t truly square with his 2018 speeches and actions. The Fed’s March 20 announcement suggests more is happening.
I think two other factors are driving the Fed’s thinking.
One is that Powell recognized the same slowing global growth that made other central banks turn dovish in recent months.
The other is the Fed’s realization that its previous course risked inverting the yield curve, which would possibly lead to recession.
But with a hawkish Fed or without, recession is approaching. Like the Fed, I am data-dependent and the latest data are not encouraging.
Cracks Appearing
The global economy hasn’t recovered from the last recession like it did in previous cycles.
Yes, the stock market performed well. So has real estate. We’ve seen some economic growth, but for the most part it’s been pretty mild.
Unemployment is low, but wage growth has been sluggish at best. A decade of low rates fuelled rising asset prices, which increased wealth and income inequality and spurred populist movements around the globe.
This recovery began fading in the last few quarters. The first cracks appeared overseas, leaving the US as an island of stability.
That’s why we also had positive interest rates and thus attracted capital from elsewhere. This let our growth continue longer. But now, signs of weakness are mounting here, too.
The problem is that we can’t rely on historical precedent to identify where our economy is. But we can make some educated guesses.
A Canary in the Coal Mine
Shipping and transport stocks are kind of a “canary in the coal mine” because they are among the first to signal slowing economic growth.
Recently FedEx reported its international shipping revenue was down and cut its full-year earnings guidance. Its CFO blamed the economy, reported CNBC.
Slowing international macroeconomic conditions and weaker global trade growth trends continue, as seen in the year-over-year decline in our FedEx Express international revenue,” Alan B. Graf, Jr., FedEx Corp. executive vice president and chief financial officer, said in statement.
Despite a strong U.S. economy, FedEx said its international business weakened during the second quarter, especially in Europe. FedEx Express international was down due primarily to higher growth in lower-yielding services and lower weights per shipment, Graf said.
To compensate for lower revenue, Graf said FedEx began a voluntary employee buyout program and constrained hiring. It is also “limiting discretionary spending” and is reviewing additional actions.
FedEx shares have dropped roughly 27 percent in the past year, lagging the XLI industrial ETF’s 1 percent decline.
This little snippet overflows with implications. Let’s unpack some of them.
Revenue fell due to “higher growth in lower-yielding services.” So those who ship international packages have decided lower costs outweigh speed. Likewise, “lower weights per shipment” signals they are shipping only what they must, when they must.
FedEx is responding with an employee buyout program and “constrained hiring.” The company is overstaffed for its present requirements. This might also reflect increasing job automation. In any case, it won’t help the employment stats.
In addition, FedEx is “limiting discretionary spending.” I’m not sure what that means. Every business always limits discretionary spending, or it doesn’t stay in business long.
If FedEx is taking additional steps, then whoever would have received that spending will also see lower revenues. They might have to “constrain hiring,” too.
But FedEx is just one company, although a large and critically positioned one. But statements like this add up to recession warnings if they grow more common… and they are.