The US Economy: Full Steam Ahead?

Submitted by Erico Matias Tavares of Sinclair & Co.

With the US stock market breaking new highs almost every week now, it is fair to say that animal spirits are on the loose. Several economic indicators suggest that this is warranted.

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The table above shows the latest readings for the Institute for Supply Management’s New Manufacturing Orders Index, a very useful leading indicator. At 69.4 last December, it is the highest reading going back all the way to January 2004, capping off growth in new orders for 16 consecutive months. Momentum is certainly on the way up here.

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The surge in small business optimism continued, as measured by the National Federation of Independent Business, with average figures setting a new all-time record in 2017.

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The table above shows the percentage of small businesses reporting higher sales over a comparable period on a net basis from that same report. After years of decline and stagnation, 2017 saw a large number of positive readings. December printed the highest number in almost a decade.

This matters a great deal because it is this sector that is responsible for a significant amount of the wealth in the US. It should be noted that this surge started in earnest after the election of President Donald Trump. Whether those expectations will be met is another question, but clearly small businesses have responded to that.

The weekly rail traffic report published by the Association of American Railroads (“AAR”) provides a great snapshot of US economic activity almost in real (weekly) time. So have the railways also responded positively to the new administration?

The grey cloud in our weekly rail shipment graphs (in units) depicted henceforth shows the maximum and minimum volume range recorded for the same week over the five years prior (2012-2016). The green line shows the readings for 2017.

Rail intermodal traffic registers the long-haul movement of shipping containers and truck trailers by rail whenever combined with (a much shorter) truck movement at one or both ends. It covers a broad range of goods that Americans consume regularly, from laptops to frozen chickens, and is thus a great indicator of how consumers are doing. Given the critical importance of consumption for the US economy as a whole, for us this is the most revealing category of all.

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The weekly evolution shows that after some hesitation last spring intermodal shipments picked up in earnest, setting new weekly records pretty much over the rest of the year. It’s full steam ahead here.

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Aggregating the weekly numbers by year offers a clearer picture, as shown in the graph above (in MM units). We believe this is one of the best leading indicators around and track it on a year-to-date basis. It clearly warned of a softening in economic activity heading into the 2008 financial meltdown. At the end of 2016 we flagged a similar concern.

However, things have turned around and the US just printed its highest intermodal shipment ever. Good news for the US, even better for its suppliers like China and other emerging markets. No wonder their stock markets have responded in kind, with many handily outperforming the US.

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But not everything is fantastic.

The motor vehicles and parts graph shown above includes all sorts of vehicles (used and new), passenger car and bus bodies, parts and accessories and other related equipment. Readings in 2017 have fluctuated around the mid-point of the prior five years. On yearly basis this represented almost a 7% decline relative to 2016, the first negative print since the 2008 financial crisis.

Is this a concern?

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This is hard to square off against actual US vehicle sales, which have held up rather well in 2017, even seeing a boost in late 2017 as per data from Motor Intelligence (in MM). One explanation for this dichotomy is that auto manufacturers and/or dealers may have been reducing inventory, hence the diminished shipments last year. We will find out the real answer in the coming months.

What about housing, another key industry? The forest products category shipments include lumber, a major input of house construction, as shown in the graph below.

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Volumes have been sluggish for most of 2017, recording several new lows over the prior 5-year range. The late pick up in the year though made the annual print flat relative to 2016.

Does this mean that housing is on the ropes?

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Context here matters a great deal. The graph above shows lumber futures prices, which have been rallying from a cycle bottom in late 2015. In fact, it seems we are about to push up to new highs. So the significant decline in rail shipments could be a reflection of tighter supplies, not sluggish demand. This is confirmed by the latest new residential construction data, which remains very healthy as shown below.

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Previously we talked about the terrible performance of metallic ores shipments, which include all kinds of ores (iron, copper, lead, zinc and so forth) and waste scrap, in 2015, followed by an even worse performance in 2016.

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However, things seem to have turned around in this sector in 2017, with an annual volume gain of 6% over 2016, the highest for many years. This suggests some recovery in industrial demand. No surprise then that many industrial metals prices have been rallying in recent months. That said, shipments are still way below the cyclical high recorded in 2006. If the recovery is sustained metals prices could rally even more from here.

What about coal? Trump was all in for coal so there must be some buoyancy here as well... right?

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Well, not quite. The modest reversal witnessed in the first half of the year eventually petered out, with many new cyclical lows printed right to the end of 2017. The recent cold temperatures in the US may have given the sector some respite, but it remains in the doldrums.

It should also be noted that the peak in electrical production in the US, according to the weekly indicators we track, was recorded all the way back in 2006 (many industrial sectors seem to have peaked that year). As a result, the substantial increase in natural gas production and resulting collapse in prices displaced a lot of coal. That’s how the free market works, Trump or no Trump.

What about oil production?

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Using rail shipments of crude oil and refined products to gauge supply levels is much trickier because volumes can be diverted to pipelines and/or the mix can change. And that seems to have been the case in 2017. The big decline in shipments, printing new lows most of last year, is not in sync with the increase in monthly US field production, shown below (in 000’s of barrels). This suggests that much of that new production is being moved by pipeline, not rail.

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As a side note, US crude oil production is closing in on the monthly record set in the early 1970s, which was followed by a relentless decline since then. Technology and abundant shale resources have certainly reversed that initial “peak oil” scenario, although rapid depletion rates of shale wells may give a false sense of abundance going forward. Crude oil prices have been rallying in recent months for a reason.

And last but certainly not least, here are the rail shipments of grains.

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After a robust first half of 2017, with producers no doubt trying to get rid of very high inventories of corn and to a lesser extent of soybeans accumulated in recent season(s), shipments steadily declined over the remainder of the year, as prices remained subdued.

Despite some challenging price conditions, the USDA is forecasting that farm incomes stabilized in 2017 after several years of decline. Hopeful news for farmers. Many desperately need the pickup not only to get by but also to be able to invest in new technologies that will allow them to remain competitive in the future. Modern agriculture is a really tough game.

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***

All in all, rail shipments are broadly confirming the change in sentiment post the 2016 presidential election. While it remains to be seen if those gains will be consolidated this year, small (and big) businesses have reasons to be optimistic.

Everything we have discussed excludes the impact of the new tax bill going into effect this year. Over two million Americans have been estimated thus far to benefit from their employers offering wage rises and/or bonuses as a result of this bill. Add in an expected tax cut for the median household and the outcome could be significant, at least on a short-term basis.

Whether the economic policies of the new administration will be successful or not the railways will likely feel it before anyone else. Automotive and intermodal shipments are the big things to watch this coming year. We will be keeping a close eye on those.

Comments

directaction Jan 13, 2018 10:33 AM Permalink

Some 27-year-old unemployed guy in my gym is day trading. No college, started out six months ago with a few grand, now he's talking about up days that make him over ten grand in a few hours.

When the taxi driver and some guy in the gym are day trading with everything they have you know the top has been reached.  

BullyBearish JimT Jan 13, 2018 12:01 PM Permalink

be careful...ziohedge's new owners have gone to the dark side...let's look carefully at their new darling, trump:

--given the MIC everything they wanted

--given big oil everything they wanted

--given the surveillance state everything they wanted

--given israhell everything they wanted, so far...

unless you benefit from any of these (hasbara trolls) and you're a self-declared trumptard, you are brain dead...

 

Remember...any market that can GIVE you money so quickly can TAKE it away even MORE QUICKLY

In reply to by JimT

Full Court Lug… BullyBearish Jan 13, 2018 12:52 PM Permalink

LMAO "new darling" Trump. Do you actually read this site? They shit on Trump so much you'd think they were CNN, including reprinting every transparent Fake News "scandal" and accusation that the bullshit artists at WaPo and NYT churn out by the bushel.

At bottom ZH are muckrakers, they just like dumping on everybody. Hard to see any consistent agenda to it either way.

In reply to by BullyBearish

Winston Churchill IH8OBAMA Jan 13, 2018 11:23 AM Permalink

Hurrah, have we all gone insane ?

Is everyone ignoring the real deflator now because of DJT ?

Our approach speed to the cliff edge has slowed a little,not in any way stopped.

We have plenty of momentum and no braking room.

Life always starts to look great just before it smacks you between the eyes.

Ask any bankruptcy lawyer what the most dangerous point of the economic cycle is, and then understand

where we are.Become a bankruptcy lawyer now, if you want to make some money.

In reply to by IH8OBAMA

MK ULTRA Alpha Winston Churchill Jan 13, 2018 2:44 PM Permalink

Poster Winston Churchill- the article was objective, reporting with statistics to back up observations. What you have done when facts are presented is to foam like a mad dog that the person is mentally ill or we're mental ill for believing the statistics presented. The true reality is you're an obsessed anti-American who has twisted reality to pursue you're anti-American slant with other loony tunes.

Could it be, your slanted, one sided interpretation of reality is a symptom of mental illness?

In reply to by Winston Churchill

Winston Churchill MK ULTRA Alpha Jan 13, 2018 3:02 PM Permalink

Bollocks.

If you cannot understand simple sums,the HuffPo wants you back.

Real inflation is running at around 8%, not 2%, so the real economy is still contracting at -3%,not

growing at all.I called out the bullshit with Obama,I will call out the bullshit with Trump.

Ignoring reality, like you do, makes you a braindead fool, and the next cannon fodder.

Only the rate of decline is flattening, but its still in decline.

IMO its too late to stop the inevitable.I wish it wasn't, but hope is not a strategy.,its for losers.

In reply to by MK ULTRA Alpha

Endgame Napoleon IH8OBAMA Jan 13, 2018 11:26 AM Permalink

Wow, were all those railroad-riding laptops & chickens made or processed by non-welfare-buttressed American citizens? 

For some reason, I thought I heard a former Carrier employee, talking about all the jobs shipped to Mexico. 

If American factories, staffed by American citizens whose major household bills are not covered by monthly welfare and refundable child tax credits up-to $6,444, are turning out those items purchased on credit, then hey, there is an economic uptick. 

 

 

 

 

In reply to by IH8OBAMA

gm_general IH8OBAMA Jan 13, 2018 1:36 PM Permalink

The ZH article that declared "if this bubble goes as much as the other tulip records, Dow 45K, yippee" that got me! It was about where the ads I get constantly in the mail declared it would go. These are the egghead geniuses who ran funds like LTCM, those were the smartest people in the room and it all blew up in their stupid faces. Hubris breeds carelessness and it encourages recklessness, its just hard-wired into us hairless monkeys.

In reply to by IH8OBAMA

Åristotle directaction Jan 13, 2018 10:40 AM Permalink

What happened to this forum? Where did Zerohedge go?

"our mission:
    to widen the scope of financial, economic and political information available to the professional investing public.
    to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become.
    to liberate oppressed knowledge.
    to provide analysis uninhibited by political constraint.
    to facilitate information's unending quest for freedom."
https://www.zerohedge.com/about

In reply to by directaction

LetThemEatRand Åristotle Jan 13, 2018 11:02 AM Permalink

My two cents is that ZH is still very much at the cutting edge of these mission statements and by far the best place to go on the web for alternative news, but we the readers need to sift through a lot of red meat and click bait to get to the good stuff.   I assume like all sites the owners of this one want to make as much money as possible, and a lot of their readership these days is probably more interested in the red meat/click bait stuff.   And I also assume there's a lot of pressure to keep the articles flowing to keep readers here.  You're not going to get a new hard-hitting piece of excellent journalism at any site every 20 minutes. 

In reply to by Åristotle

MK ULTRA Alpha LetThemEatRand Jan 13, 2018 1:28 PM Permalink

You're correct, there are good articles and posts on ZH, but when we get Strategic culture, or Misis or whatever their names, those articles are so slanted with anti-Americanism, there is no logic, even though it starts out good, most all articles go off on an anti-American tangent which doesn't make sense. One would have to be mentally ill obsessive compulsive with other mental illness, basically a one track television mind, to believe the slant and then rebroadcast the slant.

And don't forget, many of the posters are communist, communism is big in Europe, so we get communist practicing international communism on the ZH boards desperately hoping in their ignorant illogical assessments of reality, Americans will do what these posters want and that is the destruction of the USA. I want it to happen so we do not have to provide security for these POS. Take the anti-American Australians, wouldn't it be funny if 30 million Chinese on nearly a million fishing boats landed in Australia, what would the anti-Americans say, these posters are mentally ill delusional, they see THE CIA BEHIND EVERY ROCK.

In many cases with these foreigners, we are seeing a parroting, or rebroadcast of their national media systems anti-American bias. In other words, they're brainwashed, just like the neo-cons in America. No objective reality, just a delusional interpretation of the world. These posters make the most outlandish false statements, it's not only because of their programming, it's because they're poorly READ. They don't read enough to make an educated assessment of reality. They let the TV control their minds, they were brainwashed from childhood to be anti-American.

In reply to by LetThemEatRand

Mimir MK ULTRA Alpha Jan 13, 2018 1:59 PM Permalink

You must be referring to those Norwegians who Trump would love to see coming to the US and who answered, that they would not even consider it.

They choose to stay away from shithole countries, they say, in order to keep their social security, free healthcare, paid parental leaves, free abortion rights, long holidays, short working hours, free education, high state pensions and high salaries. And they live longer than Americans. 

In reply to by MK ULTRA Alpha

MK ULTRA Alpha Mimir Jan 13, 2018 2:14 PM Permalink

Trump is of the same age as me and our elementary school experience. Back then, Norway was always presented as a good place with good people. Documentaries were extremely pro-Norwegian.

Back then we sang Australian and British songs.

I doubted Trump would say it the way it has been reported. And I was right, Trump didn't say what was reported, but did say Haiti wasn't a good place. Trump was saying, and it was taking out of context, why do we take people from countries which are bad and why can't we take quality people from quality countries. And I doubt a scientific survey was conducted in Norway, considering the Norwegians are hosting US military in their country, opened up the massive stockpiles of equipment and supplies etc. Looks like the Norwegians are pushing the stand up to Russia mantra in Norway.

Norway is running out of oil and natural gas, that has been the fear, once Norway hydrocarbon production drops, then they will flock to the USA like everyone else.

We want high quality immigrates who can add to the quality of life in the USA. People like you who are extreme anti-American and want to damage America are not invited, we're trying to eliminate them out of the immigration stream as I speak.

 

In reply to by Mimir

MK ULTRA Alpha Truthoutthere Jan 13, 2018 7:19 PM Permalink

Did I hit a nerve? I am in my own country and we have to provide defense for a host of nations and we're sick of it. We want to divorce you worse than you hate us. If we leave, then YOU have to pay for your own defense.

Other than that, you have no value to the USA, you don't pay your fair share, economic/trade is a one way street with most all of these leach countries running trade surplus with the US. If that trade is shut down unemployment in Europe would go through the roof.

Hitting nerves and popping bubbles of loony tunes is what I specialize in on the ZH board, a rich environment of ignorant, not well read, television minds programmed to be stupid mindless communist.

In reply to by Truthoutthere

all-priced-in Jan 13, 2018 10:40 AM Permalink

The economy may be picking up -  

 

But hasn't the market already priced in way more than the actual and projected gains?

 

Use a broad measure - like sales / market cap or market cap to GDP.

 

It sure as hell seems like this is more than 100% priced in.

 

I have been to big of a chicken to buy stocks - but I have been buying out of the money SPY calls and have been doing pretty good - course not as big of a gain as I would have had buying the index - but % wise I can't recall a better run in such a short time.

 

Friday afternoon I sold all my calls - I am once again totally out of all equity positions - so when the market opens on Tuesday I expect another massive up day - who ever said you never get hurt taking a profit never traded in this market.