Divining the economy on Logistics demand pattern
While "worst may be behind us" and the "economy is pointed in the right direction" are optimistic rhetoric based on encouraging data around reduced unemployment rate, unemployment claims and related labour data, a key parameter that has historically been a reliable barometer of the future of the economy is the logistics demand pattern. Transportation business is a lead indicator of the economy as the industry in primarily involved in shipping basic raw materials to finished goods.
The industries' activity (or the lack of it) indicates business pipelines of manufacturers, retailers, services industry and consumers and is a lead indicator ahead of the curve. The latest stream of Q2 09 results indicate anything but the worst behind us - UPS revenue is down 16.7%, expeditor - a robust forwarder whose top line has consistently grown in the last 10 years reported decline in revenue by 38%, TNT- Europe’s second largest mail and express delivery company showed drop in revenue of 10%, DPWN, the world leader saw a drop in sales of 18%. The shipping industry, an asset heavy industry has been the hardest hit in the recession showing drop in volumes on all trade lanes with corresponding impact on revenue further aggravated by steep drop in rates. Air freight volume which is a measure of inventory velocity the marketplace demands has seen steep drop indicating either shift to sea freight which is cheaper or that demand simply ain't there. If this is how the lead indicator looks, the prognosis of this sector isn't optimistic either with most players at best indicating that there is a weakening in the decline.
Connect the dots, add the lead indicator and the forecast of the lead indicators and you easily have at the least 3-4 quarters to go before there is even any possibility of seeing upward trend in the overall economy. While this divination is a useful indicator to the quarters ahead it is worthwhile to recall Paul Krugman (of Princeton and the New York Times) who famously remarked on the science of macroeconomics - "spectacularly useless at best, and positively harmful at worst”