Rail Traffic: "Moving lower, with no End in Sight"?

A few months ago, I noticed something that seemed strangely discordant about our "Great Depression 2": consumers were refusing to stay dead, but instead showed signs of - at least partially - rising from the grave. But a look at truck traffic (which is only posted monthly) and rail traffic (which is updated weekly) showed a continued year-over-year slide.

I took a further look because one very prominent blogger has recently alluded to rail traffic several times, most recently saying it was "horrible" and "13-week moving averages are still moving lower, with no apparent end in sight" So, what's going on? Does rail traffic in particular mean the recession is continuing to plunge deeper into the abyss, or are we hitting bottom?

Here is the group of charts, courtesy of Railfax, showing the 13-week moving average of year-over-year rail traffic:

Note they show that the average continues to plunge. But, keep in mind that this 13 week average compares data from mid-March to mid-June 2009, and compares that with mid-March to mid-June 2008 -- so it is truly a very lagging indicator, in essence telling us that the period of time leading up to end of April 2009 was far worse than that period leading up to the end of April 2008. Well, duh! For confirmation, note that the year-over-year averages above didn't turn negative until February 2008 -- two months after the recession began.

But now let's look at the same site's data showing the 4-week average of raw current data, both for 2008 and 2009. These four week averages tell a different story. The four week moving averages not only tell us that 2009 is worse than 2008, they also tell us that 2009,after an initial bounce, has been flat in the second quarter, in comparison with a rise in traffic in spring 2008. In other words, the year-over-year comparison isn't declining because traffic in 2009 is continuing to slide further, but rather because an increase in traffic from spring 2008 isn't being repeated:

Additionally, note that (1) this average did peak in October 2007, several months before the onset of the recession; and (2) the most current weeks of data in 3 of the four 4 week graphs show a small upturn in 2009 traffic, compared with a decline in traffic in the same period in 2008. So is trail traffic generally getting worse, or stabilizing?

Rail traffic is moving goods to market. To properly interpret the data, we should compare with retail sales; in other words, how well did the goods moved to market sell? And this solves our mystery. From the very beginning of the recession onward, retail sales began to turn down:

Despite this, business inventories continued to rise:

Once the Wall Street/housing depression metasticised to Main Street in late 2008, retail sales plunged. All of those increased goods being hauled by railroads in spring 2008 failed to sell, leaving retailers with a huge supply of unsold inventory on their hands, as evidenced by the inventory to sales ratio:

Because inventories, as per the above graph, tend to lag sales, after the plunge businesses cut back dramatically on their incoming inventory. That overhand of inventory has only partially been worked through. Hence railroads continue to haul fewer goods to market. But as shown in the retail sales graph above, retail sales have generally stabilized at a level about 10% less than before the recession. Even automobile sales appear to have stabilized albeit at a rate about just below 10 million vehicles a year. So if incoming inventory continues to plummet as retail sales stabilize, the inventory to sales ratio could decline towards normalcy just as quickly as it rose. When that happens, railroad loads will start to increase.

Look again at the 4 week averages above, where I pointed out the small upturn in the last few weeks of data. It is too soon to say that is a trend, but if it is , the lagging indicator of the 13 week year-over-year average cited by that prominent blogger will abruptly begin to rise - a couple of months from now.

To his credit, that other prominent blogger concludes that "The good news is a bottom might be coming." But one of things I constantly harp on is that to discuss where the economy will be in the future, one needs to look at leading economic indicators, and analyze them. The worst way to discuss where the economy is going is simply to project coincident - or worse, lagging - economic indicators into the future. In projecting that "13-week moving averages [year-over-year railcar loads ] are still moving lower, with no apparent end in sight", our prominent blogger has done exactly that.

Some New Blood

I've asked New Deal Democrat to start posting here. He also writes at Economic Populist. He and I have written several articles together which were a a joy to write given his analytical and writing skills. While I don't always agree with his conclusions I have always found them to be well researched, thought-out and presented. In short, his contributions area welcome addition here at the Bonddad Blog.

Market Mondays

For the second week in a row defensive sectors were the top performers. According to Finviz, health care and utilities were the top performing sectors.

In addition, consider the following charts;


The on balance volume didn't increase with the new high on the SPYs. This indicates the total volume flow may be an issue. Ideally we want more volume as the market rises; this indicates more people are participating in the rally.


On the SPYs, notice prices got stuck around the 95 level, which also corresponds to the 200 day EMA. Remember -- a move above 200 would indicate a shift from a bear to a bull market.



On the QQQQs, prices are now below the trendline that started in early March.


Prices are also below the IWMs trend line.

And consider these foreign markets' charts -- all of which have broken trend.

Are We There Yet? Not Quite.

There's widespread consensus that things are "less bad" of late than they were in the fourth quarter of 2008 or the first quarter of 2009. It's hard to disagree with that. However, when is the recession going to end, and what is going to become of the so-called "green shoots" that have taken the stock market from 666 in mid-March to almost 950 (on the S&P) recently?

Bonddad and I recently did some work advancing the notion that the consumer -- who has been 70 percent of GDP for the past eight years -- is over-levered and in no shape to continue shouldering that burden for the foreseeable future. It's my belief that the recovery, when it comes, is going to be shallow at best, and it's not out of the question that we double-dip (assuming we actually emerge) after miniscule positive growth triggered by replenishment of the massive inventory draw-downs we've seen in the past couple of quarters.

But let's not get ahead of ourselves. When will the recession end? We know that the National Bureau of Economic Research (NBER) will not date the end for quite some time to come.

Aside from GDP, we know that the NBER looks at many other measures of our economy's health. Most notably (in what I believe may be their order of importance) are Employment (PAYEMS at St. Louis Fed), Industrial Production (INDPRO at St. Louis Fed), Real Income, and Real Retail Sales.

Here's a look at how those four metrics look of late relative to other recessions (via St. Louis Fed):





















We also know -- because he's told us -- that one member of the NBER's Business Cycle Dating Committee, professor Jeffrey Frankel, likes to look at the Aggregate Weekly Hours Index (AWHI), since employers typically cut hours before they cut bodies, and similarly increase hours before they hire bodies.



Here's what that looks like:




It is certainly difficult, if not impossible, to argue that anything has actually troughed as yet. And employment will undoubtedly not pick up until after hours are increased and employers feel that they actually need additional bodies.

Another area that the "green shoots" crowd points to is Unemployment Claims, a high-frequency (weekly) number that has shown signs of stabilization and, arguably, slight improvement.


Even continuing claims -- an important metric that needs to confirm the weekly number -- has recently (last week) improved (by a meaningful -148,000):




Now, don't get me wrong, I'll take what I can get. But pulling back the lens a bit, this is what the improvement looks like from a longer-term view:





Bottom line: While there may be some justification for cautious optimism, the key and operative word must remain "cautious." As to calling the end of the recession -- notwithstanding any positive GDP print we might get over the next quarter or two -- it doesn't seem we're quite there just yet. We will, of course, continue to monitor the available data for signs of a trough. While we will no doubt emerge from recession eventually, attention should be paid to the type of recovery we can muster, and how we're going to re-employ the six million Americans who've lost their jobs over the past eighteen months.

Another New Hire

Like New Deal Democrat, I am flattered to have been asked by Bonddad to contribute to his blog. Bonddad and I have become friendly over the past couple of years, and have collaborated on a few pieces previously, most recently here. I have been a regular contributor on economics -- for several years now -- over at Blah3.com. Among my favorite Blah3 posts are this one (accurately predicting when the NBER would date the beginning of the recession), this one (wondering what happened to all the neocons who predicted $12/bbl oil when we prevailed in Iraq), and this one (demonstrating that Bush's "boom" was nothing of the sort), to name three of over 1,000. I invite you to review my body of work over at B3.

I like using raw data, and will typically employ a number of graphs using data downloaded from BEA.gov, BLS.gov, Census.gov, the St. Louis Fed (a favorite), or elsewhere, which I then manipulate in Excel.

I look forward to (hopefully) adding some additional flavor to the discourse and complementing the fine work Bonddad is already doing.

New Deal democrat

Happy Summer Solstice and/or Father's Day to all concerned. Bonddad has invited me to contribute on a regular basis to his blog, and needless to say, I have accepted.

For those who may not already know me, I write either wonky analysis of economic data, look at long term trends that may take decades to play out in full, or compare what is to what should be. Needless to say, Bonddad and I don't always hold the same opinions, so the diversity will hopefully give you some thoughtful contrasts.

I am also a regular contributor to the blog The Economic Populist and will be continuing my participation there as well.

I thank Bonddad for his invitation and I hope my participation here adds to your reading pleasure.

Weekend Beagle and Weimar

It's time to think about anything except the markets or the economy. See you Monday.

States See Drop in Tax Revenue and Income

From Stateline:

States racing to cobble together new budgets for their July 1 deadline could find themselves sinking back into red ink sooner than they think, as Americans’ income and the taxes they pay on it shrink, new data show.

Personal income taxes paid to the states plummeted 26 percent, or $28.8 billion, in the first four months of 2009, compared with the same time period last year, the Nelson A. Rockefeller Institute of Government said in its June 18 report.

.....

The federal government found similar bleak news, with overall personal income falling in 37 states in the first quarter of 2009. Job losses, lower interest rates and smaller corporate dividend payments all helped to push personal income down, the U.S. Bureau of Economic Analysis said in a June 18 report.

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Philly Fed Shows Improvement

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There are several points from the above data:

1.) There are now two months of solid increased (the lower gray lines). While this is not strong enough to call a trend, it does indicate that activity has increased over the last two months. This has probably led to an increase in the future expectations.

2.) Notice the big bump in new orders, shipping and overall activity. Those are welcome changes. However, also notice that employment and hours worked are still hovering at low levels. That means we haven't seen enough strong and continuous activity to see movement, indicating there is still a fair amount of caution about longer term prospects right now. That makes a great deal of sense considering we've only seen two months of solid improvements.

Because of their geographic proximity, here is a link to the latest NY Fed report. Remember it fell a bit this month, but has been in an uptrend for a few months before that indicating the NY area may be just a bit ahead of Philly.

Forex Fridays

The weekly charts shows the dollar is clearly in a downward trend. Prices formed a double top at the end of last year and the beginning of this year and have been falling since. The MACD and RSI are both falling and all the EMAs are heading lower.


The dollar us currently in a bear market pennant pattern -- basically a counter-trend rally as prices move lower. Unless prices meaningfully break through the top of this pattern I would expect another downward move.

Today's Markets

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The main issue with the SPYs is getting over the 92.60 level. A move above there would be technically important. The market has a slight upward bias right now, but not an impressive one.



The QQQQs are still moving in a sideways configuration.



The IWMs are consolidating in a triangle consolidation pattern.

Leading Indicators Up Again

From the Conference Board:

The Conference Board LEI for the U.S. increased sharply for the second consecutive month in May. In addition, the strengths among its components continued to exceed the weaknesses this month. Vendor performance, the interest rate spread, real money supply, stock prices, consumer expectations, and building permits contributed positively to the index, more than offsetting the negative contributions from weekly hours and initial unemployment claims. The index rose 1.2 percent (a 2.4 percent annual rate) between November 2008 and May 2009, the first time the index has increased over a six-month period since July 2007, and the strengths among the leading indicators have become balanced with the weaknesses during this period.

Those are a nice two months of data.

Can We Afford All This Spending?

There has been a war of words written about Washington's recent increase in spending. However, none of this has focused on the numbers -- as in the data. So, let's take a look at the numbers to see what they tell us.

First, some background. I was against Bush's deficit spending for a large part of his administration. One reason was I was against the Iraq War more or less from the beginning. From an economic perspective, war is a horrible utilization of resources. In addition, Bush made the same fiscal mistake Reagan made: he decreased revenues by cutting taxes and increased spending. This is a recipe for increasing debt, which was the final result of Bush's policies. Total debt outstanding at the end of Bush's first year in office (9/30/01) was $5,807,463,412,200.06. When he left office 9/30/08) that number was $10,024,724,896,912.49.

However, I supported most of the current spending (see this article and this article for more information). The reason for that is simple: read A Monetary History of the US by Milton Friedman -- especially the chapter titled "The Great Contraction". Starting with the announcement of Bear Stearns in the summer of 2007 that two of its hedge funds were suffering major losses the US financial system has been in a shooting gallery. What really made the great depression worse were the financial events of 1929-1933 when the US went through major financial turmoil. That essentially shut down the economy, leading to a contraction of more than "50% in current prices from 1929 to 1933". This time the situation was no different. In addition, by the end of 2008 it was obvious the country's greatest threat was a deflationary spiral. In short, the government had two choices: do nothing and practically guarantee economic freefall or do something to prevent it.

Throughout the above statements is the idea that government should act prudently during good times in order to spend during bad times -- that is, use its spending muscle during the bad times to limit the economic damage of a slowdown while cutting its spending and letting the private sector take over when the economy turns around. At least -- that's the ideal. It has yet to happen in real practice (although the 1990s came pretty close).

All that being said, let's take a look at where we are now. According to the Bureau of Public Debt, total US debt is $11,406,012,959,882.55 while total nominal US GDP is $14.089 trillion, making the debt/GDP ratio 80.956%. That's not good, but not catastrophic either. However, the budget projections from the CBO provide the following deficits for the years 2009-2012: $-1.845, $1.379, $-.970 and $-658. So, assuming these estimates are correct, by the end of fiscal 2012 we'll have $4.852 trillion more in debt. Tacking that onto the current daily total of all debt outstanding we get $16.258 trillion. Now -- assuming we have no growth for the next four years and our nominal GDP stays at $14 trillion we would have a debt/GDP ratio of 116% by the end of fiscal 2012. That is not a good development. That does assume there will be no GDP growth over the next 4 years which is also not likely. However, no matter how you slice the information it is not a healthy way to run an economy.

But let's look at this from another angle: interest paid on the debt. Let's assume we don't retire any debt (which we won't) buy only pay interest on the debt. Can we at least afford that? Here is a chart of the percentage of interest payments as a percentage of total federal expenditures.



This number was at its highest in the late 1980s to the early 2000s when it fluctuated between (roughly) 14% and 15%. It dropped during the first part of this decade thanks to record low interest rates. Those will not remain for the next four years. However, the above chart indicates the interest payments are not so high we will face current problems. In addition, we do have room for upward movement on interest rates.

So -- the overall conclusion is we're going to be pushing the envelope of US finances which is never good. Overall debt/GDP will most surely be at 100% by the end of fiscal 2012. In addition, the interest component of the federal budget will surely increase as well. Now -- is this development fatal? No. But are we adding more stress to the system? Yes. But finally, do we have a choice? That is, is there another viable option right now? No. Fiscal conservatives (who by the way don't exist in the Republcan party's policy implementation arm) will argue to do nothing. But given the precarious nature of the economy right now that is still a recipe for economic suicide.

Thursday Oil Market Round-Up

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The weekly chart is still very bullish. The MACD and RSI are still rising. Prices are still advancing and have moved through all the EMAs. The 10 and 20 week EMA are both moving higher and the shorter EMA is above the longer EMA.



On the daily chart the situation is still mostly bullish with one caveat: the MACD is about to give a sell signal. Aside from that prices are still moving higher and and currently consolidating in a bull market pennant pattern. The RSI is pegged at a high level, but has been for some time. All the EMAs are moving higher and the shorter are above the longer. Prices are using the EMAs for technical support.

Let's look at the fundamental side.

Oil stocks are high but decreasing


Gas demand is increasing an d

that is leading to an increase in gas prices.

Today's Markets

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Notice how the market has been in a lower high/lower low pattern since last Thursday. However, today prices advanced through previous lows before running into resistance at the 200 minute SMA. Let's take a closer look at the last three days of action


After falling in the first hour and a half of trading prices moved higher until about 1:40 when they broke the upward sloping trend line. Volume then escalated as prices fell.

The IWMs are remarkably similar:


However, notice the QQQQs formed more of a trading pattern over the last few days.


So -- what does this mean? One of the averages isn't confirming.

Laughing at Laffer

About the inflation scare, here's the YOY chart of PPI and CPI




Now -- on a month over month basis, we're getting some stabilization.

Industrial Production Blows

From the Fed:

Industrial production decreased 1.1 percent in May after having fallen a downward-revised 0.7 percent in April. The average decrease in industrial production during the first three months of the year was 1.6 percent. Manufacturing output moved down 1.0 percent in May with broad-based declines across industries. Outside of manufacturing, the output of mines dropped 2.1 percent, and the output of utilities fell 1.4 percent. At 95.8 percent of its 2002 average, overall industrial output in May was 13.4 percent below its year-earlier level. The rate of capacity utilization for total industry declined further in May to 68.3 percent, a level 12.6 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.

If there is one figure that can blow the "things are getting better" argument it's the latest industrial production figure. Now -- the overall month to month chart is still encouraging (click on all images for a larger image):



Notice the rate of decline has decreased over the last six months save the current month. That means the current month could be a "blip" on the way to things getting better. But it also means we have to keep a very strong eye on all the industrial figures for the next few months. In addition, there has already been a ton of damage done to overall industrial production. Consider the following charts:



Notice that we've lost all production gains of the previous expansion. In addition



Utilization is at multi-decade lows. That means when the economy starts back up there is little incentive for business to engage in any capital expansion as their first priority will be to use the big slack in their production systems.

Again -- if there is a set of statistics that could really screw us up, this is it.

From the Census Bureau

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 532,000. This is 17.2 percent (±14.4%) above the revised April estimate of 454,000, but is 45.2 percent (±5.8%) below the May 2008 rate of 971,000.

Single-family housing starts in May were at a rate of 401,000; this is 7.5 percent (±14.2%)* above the revised April figure of 373,000. The May rate for units in buildings with five units or more was 124,000.

Here are some very interesting housing charts. They break down the single family and total housing starts data by region.

The West's total figures were right below 150,00o for four of the last seven months. But the three months -- February, March and April -- prevent a conclusion the market has stabilized.

There are two ways of looking at the West's data. Either we have a three month rising trend or a 6 month period where starts are fluctuating between 60,000 and 80,000. Either way it's ... interesting.

The south has stabilized for the last 6 months both at the single family level and

The total level
The mid-west has seen five months of increases at the single family level but


At the total level I think the proper phrase is bouncing along the bottom.


The northeast isn't impressing at the single family level but


The total level looks stable (although at an extremely depressed level).


Finally -- we have total US data for all housing starts (single and multi-family)


Although at a low level, that is a fairly stable six months. While I am loathe to call a bottom yet, that chart is extremely encouraging.