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Fed or Freight, Roll Your Dice
By Economic Forecasts & Opinions
Last Friday, the Commerce Department announced that orders for durable goods decreased in August by 2.4%, or $4 billion in total, defying economists' estimates of a 0.5% gain. Sales of new homes inched up 0.7%, also less than forecast. Meanwhile, masked by the cash-for-clunkers program, one of the closely-watched leading indicators, ISM Manufacturing Index, rose a larger-than-expected 4 points to 52.9, and the index has been in expansionary territory since April.
The Great Market Debate
These conflicting reports only reflect the uneven nature of the recovery raising worries about how broad the economic recovery may be. The debate centers around two chief concerns: Have stocks jumped ahead of the economic recovery? And if so, Are they setting up for a big correction? This week is crucial as some key data is set to be released such as the ADP employment report, GDP, Case/Schiller housing index, and consumer sentiment, which will either foster a technical breakout pushing the S&P (SPX) towards much higher year-end goals of 1150-1200 or convince investors to take major profits before its too late with a 20% retracement so fast it will make your head spin. Remember the old adage, stocks often stair-step up, but take the elevator down.
Freight as a Leading Indicator
To better gauge the real economic condition, I typically like to look at commercial trade related indicators to verify just how good or bad business is doing. Among them, freight is probably one of the most ignored leading economic indicators. In reality, freight volume provides a more fundamental snapshot of not only the U.S. economy, but also trends around the world.
Of course, “Peak Season” is an oxymoron this year, as freight volumes fell far below the demand cycle of years past. Nevertheless, a review of some key freight indices provides a much more sobering picture of the US economy.
Port Traffic
The latest Port Tracker report by IHS Global Insight and the National Retail Federation indicated that in July, major U.S. ports container volume was down 17% from July 2008’s volume, the 25th-straight month to register a year-over-year decline.
The report also projected total import cargo volume at major U.S. container ports to reach 12.5 million in 2009, which represents a 17.7% annual decline and the lowest level since 2003. The report further suggests:
“The projection is not for any return to the booming double digit annual volume growth rates…primarily due to …household savings rates will remain positive and more limited consumer credit availability both work to constrain import spending.”
Air Cargo
According to the latest Economic Briefing by the International Air Transportation Association (IATA), air freight is a leading indicator as it typically falls faster than world trade at the start of a downturn and then starts to rise faster than overall world trade a few months before the bottom of the cycle in industrial production.
In its latest Monthly Traffic Analysis, the IATA indicates that air freight volumes remains depressed and were 9.6% down on year earlier levels in August, and down over 20% in the first half of the year. The association further concludes that growth so far has been due to an end or pause in destocking and large government stimulus spending programs. In addition, a sustained recovery of air freight is still not yet assured given the large overhang of private sector debt and excess capacity in many economies.
Railroad Volume
Demand for rail service occurs as a result of demand elsewhere in the economy for the products that railroads haul. Thus, freight rail traffic is a useful economic indicator, both for the overall economy and for specific sub-sectors.
The Association of American Railroads (AAR) reported last week that for the first nine months of 2009, U.S. railroads cumulative total volume was down 17.3% from 2008. Fifteen of the 19 carload freight commodity groups were down from last year. Metallic Ores and Metals and Motor Vehicles & Parts were the two primary commodities which experienced the most cumulative year-over-year declines of 50% and 46.2% respectively.
Truck Tonnage
American Trucking Associations (ATA) reported last week that U.S. for hire truck tonnage fell 7.5% year-over-year in August. Though it was the best year-to-year showing since November 2008, the ATA cautioned that most economic indicators suggest freight tonnage will exhibit moderate, and probably inconsistent, growth in the months ahead.
Trucking serves as an important barometer of the U.S. economy, representing nearly 69% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.
A Realistic Snapshot
The freight indicators suggest that some of the recent positive trends were mostly due to the government stimulus efforts which masked the real state of the economy. They are also harsh reminders of the magnitude in which global trade has collapsed since mid 2008.
Liquidity programs and prospects for a turnaround have run their course, but the fundamentals are not in place to truly support further advances as consumers are reluctant to spend due to widespread job losses, slowing income growth and tight credit markets. Corporation’s cost-cutting and "stabilization" programs may not provide the propelling fuel needed either, as slow sales are restraining top-line growth as well as business investment. The volatility could worsen as some government stimulus efforts, such as the one time tax credit for first-time homebuyers and the Federal Reserve support for the banking system, wind down.
Era of the New Normal
It is hard to digest the “jobless recovery” scenario suggested by government officials as consumers account for about 70% of total US GDP growth. It will take the U.S and the OECD nations probably a decade or more for personal wealth to return to the levels of pre-Lehman. Recovery is far from certain and there is still considerable debate upon examining the freight indicators as to whether the recession is indeed truly behind us. As freight volumes are in their fourth consecutive year of decline, attested by the haunting image of the ghost fleet of recession, it is not a stretch to admit that the lack of real growth is, in fact, "The New Normal.”
## Nothing Was Solved, But Nothing Mattered ##
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The reason LTL numbers are better is that there is a tremendous amount of inventory shifting taking place. Vendors returns are up and industrial suppliers are transferring stock to other branches at a brisk pace instead of new orders for stock. LTL price wars are making it more efficient to transfer inventory.
I don't expect much of a recovery, but the data don't fully support the author's no growth thesis.
Air cargo, railroad volume, and truck tonnage all seem to have bottomed in April/May and have been trending up since then. The author dismisses this uptrend by assuming it is entirely the result of government stimulus.
But what if some it represents sustainable increases in economic activity??
I'm as bearish about the macros as just about anyone, but I also saw what "Big Al" noted and concluded the same thing. I'd like to see some more data beyond the July numbers, but there is definitely a positive trend.
well, we certainly aren't going to hear any of this on CNBC......cheerleader TV.....
now the only question left is....now that JPM and GS have jacked this market to the moon, are they going to fleece the public slowly -- so as not to panick the peasantry -- or are we going to just plummet back to earth and thru the planet?
Good analysis. It is worthy to point out again that the new homes sales was marginally up only because the prior month was adjusted down! Otherwise it would have been another sign of moribund sales as the only reason for sales of new homes, the $8000 tax credit, slipped behind the event horizon.
I have been asking those around me who say we are in recovery to give me a coherent narrative about what exactly will pull this economy back up? Consumer spending? No way - with what credit? A suddenly robust export market? In what products, Boeing airplanes and military hardware? The simple fact is there is nothing anyone can point to to support a compelling thesis of what will take over as the "growth factor." Sadly, we wasted all this money on the banksters, when we could have tried something bold like a Manahattan Project style green energy project, or new battery manufacture methods, or best of all, given huge tax cuts to let the market decide what works. Banking is only a tool for growth and productive enterprise, not the end in itself it has become, a source of debilitating (vampire squid) wealth extraction as opposed to wealth creation. How hard is all this to figure out?
Re; All the tankers loaded with oil, waiting for higher prices; Don't they constitute a bubble that will cause oil prices to drop seriously, if demand and higher prices don't come along quickly?
Dian, kudos to the analysis and fabulous data - even a cartoon character who smells can enjoy a data set like this.
Cheers,
Pigpen
The bear market rally is not over until the weekly chart tops.
It hasn't, yet.
DOW / SP500:
Daily trend - ongoing topping action is now bearish / neutral
Weekly trend - neutral / bullish
Monthly trend - bearish (since early 2008)
MORE:
http://www.zerohedge.com/forum/market-outlook-0
Concise and clear. Thanks.
Excellent article; thanks for the charts & the commentary on air freight. This data is not manipulated by the gov't. As far as FED or freight, definitely freight!
You called?
Very good article. Great to have all these bellwhethers of general economic activity presented in one place.
The real world can be such a pest to wall st sometimes.
I have no experience or point of reference by which to assess to what degree this-
http://www.dailymail.co.uk/home/moslive/article-1212013/Revealed-The-gho...
supports your submission, but I'll presume the 100 odd ships in this photo are idle tankers (and not a us buildup on Iran's shores ;) )
Thanks. Clear numbers & logic.
I'll pass it on to other worried 'investors'...
with all their spinning prayer wheels.
Is freight a leading or coincident indicator?
Great post.
Nice article loaded with data points Dian.
Thank you for sharing.
Good analysis. I should add, at what point do the y-o-y comparisons start to lose relevance? that is, at some point the comps get lower and lower. So say we "stop getting worse"? Are we at a new equilibrium? A stable plateau from which to build a base? Or a temporary lull on the way to an even lower level?
Let US not forget Baltic Dry Index, down 49% since
June 2009.
So few use yoy, let alone longer-term comparisons
including the Great Depression, that the
one handed free market economist historian is king.
Today looks like the elevator scenario more apt than
the stairstep on the cover of Business Week.
Our long term indicators suggest transports may not
bottom until 2012.
Finance that!
JubileeProsperity.com
Stuck in the mud. Zombie banked turned into Japan.
People don't realize the recession was neither really prolonged or fixed or sped up. Without changing the economic system when it explodes it's indebtedness it gets put into limp mode for a decade or two. Real liquidity and real economic activity are easily dwarfed by illusory indebtedness under a fractional reserve sysystem.