Inflation occurs when consumer spending grows faster than the supply of goods and services, while disinflation happens when spending growth slows more than output growth. Policymakers aiming for 2% inflation face a challenge because wage growth has remained persistently strong, driving higher spending and inflation. Since productivity hasn’t kept pace with wage increases, inflation has been running about 1% higher than pre-pandemic levels. Recent data suggests wage growth hasn’t slowed as expected, and the job market may be strengthening, limiting room for inflation to ease. This could lead the Fed to take a more aggressive stance to prevent inflation from accelerating.
It seems fitting to analyze one of the Fed’s favorite measures of wage growth since we will be discussing the jobs data relative to the Fed’s likely next steps. Jan Groen writes in his article analyzing the most recent jobs data release that
“The Employment Cost Index (ECI) is seen as the Fed’s favorite gauge of labor compensation growth, as it corrects for any compositional shifts across sectors (much like the Atlanta Fed Wage Growth Tracker). The Q4 ECI report was published on January 31st. The most important measure from this report is the ECI for wages of private sector workers (ECIWP), stripping out non-wage labor compensation (i.e., incentive pay) as well as public sector wages. ECIWP was up 3.7% year/year in Q4, comparable to 3.8% growth in Q3. Much in the same way I do for monthly wage measures, one can use the trend estimates for labor productivity and the labor share outlined above to get a trend wage growth estimate consistent with the Fed’s 2% inflation target. This simply equates to 2% plus the year/year growth rates implied by the earlier discussed trend estimates of labor productivity and the labor share.”
According to this measure, the Q4 ECI growth was about 1% higher than what would be needed to be on pace with a 2% inflation rate. I have been the first to ask before: “Do we HAVE to hit 2%, can’t we just say 3% is the new 2% and call it a day?” For various reasons economists have insisted that the Fed will not take that mentality. The problem is, even with inflation measures within 1-1.5% of target right now, they are precariously positioned to be susceptible to the effects of policy uncertainty. Which could cause further increases in inflation. So to abandon the goal of 2% now seems it would only increase the likelihood of inflation increasing yet again.
CPI, another measure of inflation, has been running consistently above target. CPI inflation rose 0.5% in January, the largest monthly increase since August 2023. The core metric, which is even more important for the Fed, also rose higher than forecasts at 0.4%, the highest since March. The increase was led by a rise in goods prices, which is what is making the Fed sweat a little I’d have to imagine as goods will be easily impacted by tariffs and other policy changes.
Tuan Nguyen, Ph.D wrote on LinkedIn that:
That said, these components will have the most significant impact on the public, further fueling the recent rise in inflation expectations—the number one metric that no one, especially the Fed, wants to see increasing. Given the policy uncertainty surrounding trade and immigration, we believe it is more than appropriate for the Fed to keep rates unchanged until inflation shows further progress toward the target. At 3% year-over-year inflation—3.3% for the core metric—there is no justification for lowering interest rates at the moment. If the administration continues to push forward with tariffs, strict immigration policies, and tax cuts, we see more upside risks to inflation in the months ahead.
I just got back from the Manifest conference in Las Vegas, where I moderated a session titled “Unpacking How Procurement Has Evolved”, and one of my panelists, the amazing Susan Johnson from AT&T, made a comment about procurement best practices. She called attention to the fact that everything used to be about JIT models, and then the pandemic shifted us to “just in case” inventory models. That mindset is what left us with a severe inventory oversupply across many goods sectors in 2022-2024. Most industries seem to have taken their inventory rightsizing very seriously, as we are now seeing inventories to sales ratios that are even below pre pandemic norms.
And as Matthew Klein points out in his graph, low inventory levels are not necessarily inflationary, but they do limit disinflationary impulse, and they have the potential to cause inflation should it become more difficult or costly (effects of tariffs) to procure and produce these goods.
Matthew writes alongside his graph:
Whatever the exact reasons, the tighter conditions suggest that goods markets were already fragile to new supply shocks before any concerns about tariffs or other disruptions. That makes goods disinflation less likely, and should therefore be another source of persistent inflationary pressure relative to pre-pandemic conditions.
While costs of goods have gone up, spending on goods has been trending down lately (for the first time in a long time). Consumer spending on goods is one driver of truckload volumes, and so we have to notate this change. On my last regularly scheduled podcast episode, Paul Bingham said that just the uncertainty of tariffs would be enough to have an impact, and so it has. It would appear that we experienced a pull forward of some inventories at the end of 2024 that boosted freight volumes around peak, but also might have been evident of consumers making purchases to get ahead of potential inflationary increases as well. Jan Groen wrote:
Heightened tariff uncertainty is often assumed to encourage firms to front-load investment spending. Similarly, consumers might well have been accelerating durable goods purchases (e.g., cars, appliances) in anticipation of higher future costs (I noted this in the context of the December PCE report). The chart above suggests that such a shift has reversed durables CPI’s decline since mid-2022, coinciding with increased trade policy uncertainty since the election. This may well be due to firms in the affected sectors that now have greater pricing power because of this change in spending behavior, contributing to broad-based inflation.
I see very little evidence to support any new growth in consumer spending in the coming months. Inflation holding steady, tariffs creating uncertainty, and interest rates holding steady, as well as the 30 year mortgage rate still sitting at a record high. Home buying, moving, building, it all drives a lot of spending along with it, hot housing markets bring increased consumer spending on goods. The problem is, I’m seeing little reason to expect this spring’s housing market to be hot with the Fed’s likely decision to hold rates where they are.
Jason Miller provided commentary this month on this topic as well,
The FOMC pausing interest rates isn't a surprise. The biggest issue I see right now is what happens with the 30-year mortgage rate. The 30-year staying above 6.9% doesn't bode well for an anticipated uptick in housing activity in 2025; the BEA's data on investment in various parts of that complex has been moving sideways. Residential investment holds the key to improved trucking demand conditions (especially since January's motor vehicle sales data showed that November and December may have been a bit of a temporary bump, as opposed to a true increase in trend).
And as I do most months, I check in with Jason to get a pulse on how manufacturing is looking. As the number one contributor to trucking volumes, manufacturing is critically important for the trucking industry.
January's ISM PMI subindex for new orders came in above 55 for the first time since the first half of 2022, which is a good omen for future trucking demand (e.g., the index had a reading above 60 in January 2017), with the caveat being that there are some concerns that tariff uncertainty may hold back capital investment for projects whose ROI is sensitive to cross-border trade.
Speaking of investment, the BEA's GDP data for inflation adjusted (a.k.a., "real") private investment by type of equipment is not painting a good picture for at least the first half of 2025. Investment has been falling for agricultural machinery, construction equipment, and mining machinery. These data are consistent with ag equipment manufacturers reporting a bleak outlook for 2025 and oil drillers stating they don't plan on increasing fracking.
I think it would be behoove of any trucking company or brokerage to analyze the investments being made in their top 10 customers’ industries to understand growth or contraction potential this year.
The uptick in manufacturing data gives some optimism to growth in the sector, as well as some very modest growth in overall truckload freight rates. The most recent release of the Cass Truckload Linehaul Index says:
The Cass Truckload Linehaul Index rose 0.6% m/m in January, the fifth straight small increase from a cycle low in August. The y/y change inflected to a 0.8% increase in January from a 0.4% decline in December. There you have it, folks, another important positive freight cycle inflection. For those looking for something similar to the past two cycles, expect a long wait, but this cycle is moving in a positive direction. This index fell 10% in 2023, and another 3% in 2024. Where it will go in 2025 is a big question, but it is off to a positive start. Perhaps the most important takeaway this month is that while volumes remain soft, capacity has adjusted enough to result in modestly higher rates. In addition to tariffs, this could be a key theme of 2025.
However, when we look at a similar chart produced by DAT using their data, we see signals that we are stuck. Rates strengthened during peak, but we knew February would be the test of seasonality. And so far it has gone as expected, with rates decreasing in the second half of January and into February. Ken Adamo added some commentary on LinkedIn around the below graph that DAT provides this newsletter each month. He wrote:
The January data from DAT Freight & Analytics is complete and it looks like rates are completely stuck. I think the market is looking for direction a bit and it's hard to find any substantial grounding given the economic uncertainty caused by nebulous trade policies. February is not off to a good start and is underperforming seasonality. I expect we will see a backslide in the YoY data unless things pick up in the next week or two. It's hard to have any confidence in what will happen next until we get clarity on where this tariff policy is headed. I know it's not a great message to say "here's where we are and most of us are unsure where we going", but I think that's the best we've collectively got right now.
Here is the graph referenced above:
In a different view, here are the recent month to month changes in rates. As we are already half way through February, it will be interesting to see if these two lines in fact take a dip next month, further proving that normal seasonality is back in play.
Reefer YOY% change in rates:
Still a notable gap between spot and contract in reefer rates.
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Episode 46: With Guest Paul Bingham
I've been listening to Paul's economic outlooks and forecasts since before I started this podcast. Needless to say, I'm very excited to now have him join me on our next live Meet Me For Coffee episode! Paul is the Director, Transportation Consulting, at S&P Global Market Intelligence where he is part of the team that provides data and analysis for decision making for supply chain management, trade and freight transportation investments, planning and policy making. We plan to talk tariffs, policy uncertainty, corporate tax rates, industrial production, US GDP growth and 2025 forecasts, and more.
Manifest Content:
We had SO MANY amazing interviews at Manifest this year, browse them all here!
Visibility, Security and Transparency in Cold Chain Logistics with Daniel Knauer - listen here
Using AI Effectively: Why Scheduling Automation is Gaining Momentum with Deema Adada - listen here
Combating Fraud and Collaborating with Brian Gill - listen here
AI, Automation, & Leadership: Tech and Women Driving Change in Logistics with Anne Holtzman and Meg Boaz - listen here
Why Your Pricing and Forecasting Accuracy Matters with Carly Gunby - listen here
Going Beyond the Limitations of EDI and API with Matt Salefski - listen here
Building Tech And Teams That Move Freight Forward with Andrew Verboncouer - Listen here
Real Estate, Economics & 3PL Pricing: Navigating 2025 with Matt Schroeder - Listen Here
Leveraging AI to Drive Reliability, Scalability and Sustainability with Jeff Schmitt and Bob Reny - Listen Here
Balancing Relationships and Automation - The 3PL Tightrope with Craig Allan - Listen Here
Offshore Talent Evolves as Technology and AI Expands with Nick Schrock - Listen Here
Making Dynamic Pricing Work for Everyone - The Way Forward with Omar Singh - Listen Here
Check out our Channels on your preferred platforms!
Meet Me For Coffee with Samantha Jones seeks to correlate macro-economics to freight markets (just like this Newsletter does) and offers a chance to hear various industry and non-industry experts explain their thoughts on economics and freight markets.
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