Transports Keep Flashing Warning Signals Even as Stocks Flirt With Records


FDX 1.02%

has offered the latest signal that a turning point is coming in the business cycle.The delivery company cut its 2020 outlook after the closing bell Tuesday, pointing to trade tensions and a weak global economy. Chief Executive

Frederick Smith

said on the company’s conference call that FedEx is taking steps to reduce its capacity, partly because the absence of a trade deal with China has reduced the movement of goods internationally.Investors often look at the transport sector as a bellwether of the economy. Believers in the so-called Dow Theory say weakness in shares of companies that transport raw goods and materials can point to turmoil for the broader market.

Sectors including transportation and manufacturing have been sending out signals for months that a turn in the business cycle is near, leaving investors to question the longevity of the decadelong bull market in U.S. stocks. The problem is there isn’t any easy demarcation between a growing economy and a contracting one, no solstice or equinox that marks the turn of the seasons. Divining when the economy has slipped into a recession—or, at least, doing it ahead of other investors—requires sifting and analyzing myriad tea leaves and smoke signals. Although the broader market is still flirting with records, the transport sector has struggled to recover lost ground—a potentially ominous sign for investors who believe transports need to rebound for the market to break higher. The U.S. manufacturing sector, some argue, has already fallen into recession. On Monday, the New York Fed’s manufacturing index slid to just 2, below its level from the beginning of the last recession, which began in 2007. The Dow Transportation Average—which tracks 20 of the nation’s largest airlines, railroads and truckers, including FedEx—is still down 8.8% over the past year, though it has gained 15% this year. FedEx itself has fallen 37% over the past 12 months, including a 12% drop this week.

Additionally, an index of freight shipments maintained by the research firm Cass Information Systems Inc. has been falling every month this year. After the 3% drop in the August index, the firm said “the shipments index has gone from warning of a potential slowdown to signaling an economic contraction.” By any reckoning, this expansion is old. It began in June 2009, making it the longest on record, and it shows some of the typical signs of a late-stage expansion. That doesn’t automatically mean the expansion must end, though. Even the National Bureau of Economic Research, the official arbiter of the cycle, doesn’t have a strict definition of it. While the shorthand is two consecutive quarters of contracting GDP growth, it isn’t a concrete definition. The business cycle can be read through economic data, but it is really about human nature, said Nick Reece, an analyst and portfolio manager at Merk Investments LLC. That is what makes it so hard to pin down. “It’s driven by greed and fear, emotions of excessive pessimism and optimism.” The employment picture looks healthy, with the unemployment rate and weekly jobless claims both low. But a better way to examine the health of the workforce, Mr. Reece said, is to look at moving averages rather than one month’s numbers.

SHARE YOUR THOUGHTS Do you think the transportation sector’s struggles are temporary, or a sign of a bigger problem for the economy? Join the conversation below.

For example, he said, when the 12-month moving average of jobless claims—currently at 221,800—rises above the 24-month moving average—currently at 223,500—it is a sign that growth in the labor force has peaked. Another sign is when the current unemployment rate, 3.7%, moves above the 12-month moving average, which sits just one-tenth of a percentage point higher, at 3.8%. Those numbers haven’t flipped, but they are close. Mr. Reece thinks the economy will keep growing, but he puts the chances of a recession arriving in the next six months at 30% to 40%. “We’ve been in the eighth inning for a long time,” he said. To receive our Markets newsletter every morning in your inbox, click here. Write to Paul Vigna at

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