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.
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.
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.
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.
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.
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.
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?
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.
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?
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.
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.
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?
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?
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.
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.
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.
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