It’s becoming more difficult to ignore the news from around the world. Baltic Dry Index on all time lows, shipping of goods appearing to be in a lull and manufacturing posting poor results. None of this by itself says recession is coming but a multitude of factors starts to mount up against having optimism.
We need to keep an eye on PMI’s (DEFINITION of ‘Purchasing Managers’ Index –PMI‘ An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.)
A commentator I have a lot of time for is Raoul Pal who describes himself as…. (Founder – Global Macro Investor and Real Vision Television, Business Cycle Economist, Investment Strategist, Economic Historian, Traveller and Rum Drinker…) in a hour long discussion on Real Vision says he pays special attention to PMI’s as an indicator for recession.
No change to ‘dire’ performance in UK’s manufacturing sector
It’s not the jobs report or the latest housing data but railway cargo that has analysts at Bank of America concerned.
Railroad cargo in the U.S. dropped the most in six years in 2015, and things aren’t looking good for the new year.
“We believe rail data may be signaling a warning for the broader economy,” the recent note from Bank of America says. “Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last week’s -10.1 percent decline, has not occurred since 2009.”
BofA analysts led by Ken Hoexter look at the past 30 years to see what this type of steep decline usually means for the U.S. economy. What they found wasn’t particularly encouraging: All such drops in rail carloads preceded, or were accompanied by, an economic slowdown (Note: They excluded 1996 due to an extremely harsh winter).
“Similar periods of weakness have occurred in only five other instances since 1985: (1) the majority of 1988, (2) the first half of 1991, (3) several weeks in early 1996, (4) late 2000 and early 2001, and (5) late 2008 and the majority of 2009 … all either overlapped with a recession, or preceded a recession by a few quarters.”
Of course, many would argue that a shift away from coal-powered energy, a slowdown in the industrial sector, and the petering out of the U.S. shale boom would naturally lead to fewer goods being moved by rail. Hoexter and his team, however, suggest that the slowdown is spreading to more consumer-oriented segments. Intermodal carloads typically related to consumer goods were up 1 percent in the first quarter of 2015 and 3.6 percent in the second quarter but fell 1.7 percent in the final quarter of last year.
Thus the team is taking a cautious tone, at least through the first half of the year when the analysts cite tough comparitives. “While many of the rails have successfully trimmed expenses commensurate with volume declines, we are concerned about the extent to which cost-cutting can support [earnings-per-share] growth targets,” they write.
