TranSystems Transportation Activity Index, July 28, 2010



Durable Goods and Consumer Confidence Drop

This week saw a continuation of the dual personality that is coming through in the economy. Just when corporate earnings season was showing us that profitability was strong, most of the outlooks were cautiously optimistic, and there might some light at the end of the tunnel, we get some reports that just don’t seem to fit with the general direction. But, when breaking them down, they make sense.
General Comments:
Durable Goods:
Durable goods orders for June were off another 1%, worse than the .8% drop in May and the worst performance since August of last year.Digging below the surface headlines, there is a story to be told and depending on how one views it–can be positive and negative.

One of the key metrics the broader market watches are the orders for non-defense capital goods (excluding aircraft) which actually increased by .6% for June. We could take that as a positive. Or, when taken into context with May’s reading of the same metric being up by 4.6%, we might start to scratch our head a bit. Economists will admit that the durable goods orders metric, because of what it measures, can suffer from wild fluctuations. The big-ticket nature of these goods can significantly sway a reading from one month to the next based on the delivery date of those goods and how the orders are placed. The non-defense capital goods metric is a strong indicator for capital spending by corporations.And although it was up, it is tailing off at a time when we would expect it to be gaining momentum during the third quarter peak. So something is out of whack and the market is concerned that it is the general economy and future demand for big-ticket items.

Consumer Confidence:
Sorry, but we are a fickle crowd.By that, we mean that consumer psyche is one of the most studied and often most misunderstood areas of business.Billions of dollars are spent each year to measure, study, and interpret the consumer. Businesses want to know their mood, their propensity to spend money, their tastes, and just about every little demographic about them.And yet, consumer psychology is a constantly moving target.

This is important for several reasons. First, consumer spending accounts for 70% of US GDP. Simply put, so goes the consumer spending pattern–so goes the US economy. Second, just because a consumer says that he or she is worried about the economy doesn’t mean they won’t spend money.There have been many times when consumers were pessimistic about their future but they still went out and spent money like it was going out of style. We can call that “therapy spending”: “I am depressed, therefore I shop”. As long as they have access to credit, this can happen.

Unfortunately, the reverse can be true. Consumers can feel good about the general direction of things just because the US went further in the World Cup than they thought they would, or a baby is pulled from an old well after hours being stuck, or we simply like the rags-to-riches story of a homemaker that can become an American Idol.
So, consumer moods are down. The outlook is bleak. Depression in the ranks of the consumer reins. And retail sales are up. What do you do with that information? We tend to watch access to credit more than anything. Without the means to spend money, sentiment doesn’t matter. Right now, the consumer is feeling a general tightening of credit and the job markets have not opened up enough to start making a difference. We feel and see that in the sentiment numbers.

As transportation or supply chain managers (or those just interested in the sector), the consumer metric is critical. Business spending alone cannot sustain a long-term recovery without the consumer coming along for the ride. And right now, spending in the high-tech sector is great for the sector–but it creates a lot of efficiency that reduces demand for workers overall (companies increase productivity). Eventually, the cycle will catch itself and the recovery will stall if there are not sustainable sectors of the broader consumer economy that pick up at the same time.

Broader Markets:
One additional item worth noting in the latest TTAI update is the activity happening in global markets. There are a host of countries that will be growing in the 7-10% range this year, and many are key trading partners with the US. Among the countries to watch are China, India, Brazil, Indonesia, Singapore, South Korea, Australia, Peru, Russia, and even Germany (if not pulled down by EU concerns).

Activity in these countries is part of the global container pricing story. As container demand (deep-sea shipping activity) increases in these countries, it increases the relative cost of shipping goods to the US. And, because the rising cost of transportation is not entirely being driven by increased activity in the US (it is a function of tightened capacity on a global basis), we get an increase in cost without the corresponding increase in consumption. It’s an inflationary pressure not being driven completely by primary demand in the US. So, it could have an impact on growth if individual product prices start to increase. The inflation figures for the US are a lagging metric–it typically takes a month or two for the consumer prices indexes to catch the real-time economy of what is being felt on the street. It is difficult to take an increase, per container of nearly $1,500 and not affect the shelf price of goods. Companies have to recover the additional cost.

The Federal Reserve is not signaling broad-based inflationary pressure anytime in the near future. Just understand that the consumer, and his/her disposable income, will be affected by some of the relative prices of the items we purchase on a weekly basis. And transportation costs are going up–which will affect every product we purchase.