Transport: The 11th Leading Economic Indicator is Negative

"An economist's guess is liable to be as good as anybody else's."  - Will Rogers 

Economists use the ten components of the Leading Economic Index to predict and confirm whether we are headed for a recession. To confirm that we have been in one is a simple two consecutive quarters of negative GDP growth.  In August, the Conference Board who produces the Leading Economic Index stated:

The six-month change in the index stands at -0.9 percent (about a -1.8 percent annual rate).

In other words, things are worse than before but not by much.  Sorry, things are much worse but indexes we use and the underlying data must have inaccuracies when predicting economic growth. 

Simple Economic Meters

Using electricity as an example, the way we know how much energy we produce is meters at the sources of production.  We can validate this information simply by adding up the meters at the points of use, or anywhere else in the distribution chain.  If there are differences, we attribute these to various factors such as line losses, theft or meter inaccuracies.  If the differences were great, we would have to investigate the reasons. 

To measure economic activity, there are many places we can put meters.  We can measure money flows, values of products and services produced, or employment.  We should expect a pretty close correlation between these meters, but these leading market indicator meters are currently heading in different directions (three up, seven down).  I would think economists would analyze these differences and explain.  The explanation is more important than the numbers. 

Transport is the 11^th Economic Indicator

Transport of goods is a major indicator of economic activity. It is a meter on the distribution of our economic product. 

Truck Transport

I would have liked to use diesel fuel use as the measure of growth.  The majority of diesel used in the USA goes for truck transport.  Unfortunately the diesel numbers are buried inside distillates (which include fuel oils).   In the latest reporting month figures by the BEA, distillates being supplied to the market shows a sharp drop (over 8% over the last reporting month, and over 9% year over year) which could be a data error.  But the negative growth of the trucking industry can be confirmed from the latest BLS report on employment. The current over the month change in truck transportation employment is down 5.1%, and the prior three months employment average is down 7.1%.  This confirms a sharp contraction in the trucking industry which is the delivery mechanism for the US economy. 

Rail Transport

According to the Association of American Railroads August 28, 2008 press release, overall rail traffic is down slightly.  HOWEVER, Intermodal volume totaled 230,437 trailers or containers, slipping 3.1 percent from a year ago. Trailer volume was off 2.0 percent while container traffic dropped 3.5 percent.  Intermodal volume is a direct indicator of industrial output. 

Ocean Transport

Using June and July figures (if reported) from the major port authorities around the USA, TEU volume (equals one 40 foot sea container) is down since the beginning of 2008.  The majority of manufactured goods imported or exported from North America travels in sea containers.  

There is clear evidence that the volume of trade within the USA and between its trading partners has diminished. The extent of the drop is significant and cannot be laid off to statistical anomalies.  The red flag is on the TEU volume (import and export combined) which has increased YOY since records were published beginning in 1990 – including recession years.

click to enlarge

It should also be pointed out that year-to-date export loaded container numbers which are included in the above charts are significantly higher in calendar year 2008 compared to the same period in 2007.  These export loaded container numbers continue to be strong showing evidentiary support of a real increase in US exports. In previous years, roughly 3 containers were imported to 1 exported (this ignores empty containers).  This ratio is now running closer to 2:1.  If it were not for a fall in the total TEU numbers, this would be great news. 

The economic output is down. The evidence is the shipping volumes (international and domestic).  Now all we have to do is wait for the rest of the leading economic indicators to catch up.

Disclosure: none

Comments

[phdinsuntan...:]

what about shorting the Russel 2000? TWM looks attractive with your comments

2008 Sep 01 08:04 AM

[Pauly B:]

Rail is more efficient than transporting by truck and will continue to remain strong. Many railroads are reporting stellar earnings and are reevaluating activating or getting old right of way back. Although not talked about alot, rail appears to be one of components of the much needed energy policy. Berkshire Hathaway saw this in its recent purchase of railroads.

I agree volumes are dropping but when it turns rail will be stronger than ever.

2008 Sep 01 08:25 AM

[lakshmi:]

Why use 20 ft containers rather than 40 ft containers for analysis?

2008 Sep 01 08:41 AM

[Urbane Gori...:]

As rail transport increases, so does the need for intermodal transport.. Small trucking firms and intercostal barges.... Trucking companies 'like' SAIA and Mississippi barges like Kirby (KEX) would appear to be the support that rail needs (as they can't deliver door to door) and these companies are under the radar.

jegan ;-)

2008 Sep 01 02:17 PM

[Steven Hansen:]

40 foot containers are included. TEU is defined as Twenty-foot Equivalent Unit which mean a 40 foot container is two TEU.

2008 Sep 01 08:12 PM

[whidbey:]

Very interesting data, I wrote my dissertation on transportation as harbinger of economic activity. The correlation was about .8 which was a good indicator that your speculations are useful predictors. The net current account is still very negative, as is much else in the US economy. The credit issues have shifted to new ground and they seem to come in waves, the credit card and car loans are sort of the last of the parade - maybe. But we will have the recaptialization of banks, and the personal balance sheets. Years away from a recovery, or should I say we are still in the descent?

2008 Sep 01 08:46 PM