Shockwaves in the industrial economy

The current outlook for industrials is clouded by uncertainty, but risks are skewed to the downside. In our view, capital expenditure will continue to underperform until the coronavirus pandemic is over. In addition, the energy sector will see a wave of credit defaults and then bankruptcies, followed by consolidation and lower production, and transports will scramble to react to virus impacts according to their modal exposure.

We discuss leading indicators of U.S. industrial production, including Japanese Machine Tool Builders Association (JMTBA) new orders and flatbed trucking tender rejections. JMTBA new orders are quite low, while flatbed tender rejections have rebounded, likely due to a fairly robust housing market.

The average energy sector bond is trading like distressed credit; less demand, particularly by passenger airlines but also by automobiles, container ships, and refineries, will keep prices low and turn earnings deeply negative. Oilfield services firms and the transportation companies – flatbed and specialized trucking carriers – will feel the pain of crashing WTI prices.

Transportation companies face sector-specific volume challenges (air, ocean, intermodal, rail, truckload, and LTL will all behave differently as business investment and consumer behavior shifts). We worry that truckload volumes spiked by consumer panic-buying now will be repaid with volume troughs later; we just don’t know when that will be.