Wednesday, July 22, 2009

Economic recovery around the corner?

So much talk of a recovery...I decided to check some vital signals to verify the prognosis.

Forward indicators like the Baltic Dry Bulk index definitely show a slight recovery. I was caught short when I was read articles stating that all port traffic into and out of China had virtually stopped and shipping rates to China dropped to zero for the first time. Since then, demand has snapped back and the trend is clearly upward. This is a positive sign regarding international trade, but could just be a bounce due to the artificial support programs being implemented for the credit markets that allowed trade to occur that could not move due lack of supply of Letters of Credit in the market during the 4Q 08 and 1Q 09.

Next I looked at Warren Buffett's favorite indicator, rail car traffic. Across all indicators point to ~20% YOY decrease in traffic with no major upturn in product to be moved in sight. I think we can draw from this consistent 20% margin is that the consumer demand is not returning yet, and that retailers see no need to restock to previous inventory levels. This may also indicate that the upbeat earnings reports were achieved through extended cost reductions rather than top line gains or profit margin increases.

Finally, I looked at Conference Board LEI index to get a broader view of the issue. It seems that there is a significant pick up in economic activity that is not translating to consumer spending. The distorting factor with this index is that two of the leading components are stock market prices and interest rate spreads. Both of these components have been benefiting from significant government intervention in the banking sector and auto sectors. For the sake of the economy let's hope that government facilitation of the credit markets translates into real economic demand to make this uptick sustainable. Normally, those two events happen in the other order.

Overall, there has been a marked change in business environment, even if it is not evidenced in actual economic activity. The alleviation of fear is the first step to moving to a normal economic environment. Yet for Obama and Bernanke, it may serve more to bolster confidence based on perception rather than emphasize the facts and the sober reality.

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