Last week Federal Reserve Chairwoman Janet Yellen testified to lawmakers over the current state of the U.S. economy, and her comments painted a less-than robust picture. While the stock market tends to dote on these semi-annual testimonies, when it comes to the tone of the economy there are far better indicators that bear watching.
This is particularly the case given the current unevenness of the domestic economy. While the industrial and manufacturing segment continues to hum, last week we received reminders that consumers are continuing to hold onto their dollars amid low-quality job creation as retail sales and housing starts reports once again disappointed expectations. Still, a gauge of existing home sales topped views in June.
The question becomes how does the individual investor identify and keep tabs on those pockets of strength? Historically, there’s been no shortage of data to identify and parse, but lately Twitter (TWTR) and other website have ramped up the velocity dramatically. This risk that one runs is too much “data” becomes a cloud of noise that threatens you with what we professional investors call “analysis paralysis” rather than identifying a clear, investable signal.
So how do you avoid the noise and focus on the signal? It helps to remember what it is the companies considering investing in actually do and how it is they really generate their profits, particularly at the operating line. Sifting through the companies’ financial reports (8K, 10K) on file with the Securities Exchange Commission can be helpful as is reviewing financial presentations that tend to be housed on a company’s investor relation web page.
Once you understand the business, you can then make a list of data that you want to monitor. There is ample data from the government, but it’s the “other” data that can offer better insight.
Above I mentioned the manufacturing economy has been robust. A quick check of several government published statistics – industrial production, factory orders, durable orders and so on – bears this out.
While helpful, you have to be careful to understand how these data are calculated. After all, how much weight can you put on data that offer a reading on inflation, but excludes food and energy prices? How can you rely on an unemployment rate that has been dropping as more citizens have been leaving the workforce than the number of quality jobs being created?
To overcome these shortcomings, serious investors follow a number of third-party and other data sources. When it comes to the manufacturing economy, monthly third-party data from the Institute for Supply Management and Markit Economics with their respective Purchasing Managers’ Indices (PMI) in my view paint a much better picture given order, backlog and input pricing data. This week Markit will publish its July flash PMI data for the U.S., China, and the eurozone and this will offer the first real take on how these economies performed during the month. It’s a dataset I watch each and every month and so should you.
There’s another set of corroborating data to follow. A great example of this can also be found for the manufacturing economy. Think about it. When a company manufactures something – a part, component, sub assembly, or even a finished product – it has to not only get the building blocks to build its product, but it has to get it to its customers be they other manufacturers, distribution centers or retailers. That means paying attention to transportation activity and that data are widely available to you and me.
Two such pieces of information that I tend to track are weekly rail car loadings and truck tonnage. The American Association of Railroads does a great job of not only publishing the weekly and year-to-date loadings data, but it also offers several views on the data including intermodal loadings and a deeper dive on 10 carload commodity groupings. It’s data like this that offer near real-time insight.
Over the last few months, U.S. intermodal volume has been strong and through the week ending July 12, those car loadings are up 6% on a year-to-date basis. For those who are unfamiliar with the term, intermodal freight transport involves the transportation of freight in an intermodal container or vehicle, using multiple modes of transportation (rail, ship and truck), without any handling of the freight itself when changing modes. It’s a great measure of economic activity.
Intermodal is not alone, as U.S. freight carload traffic also rose 4.8% for the week ending July 12. That's well above the year-to-date average of 3.4% as of July 12. Comparing year-to-date figures at various points during the year lets us know if the traffic and subsequently the economy are picking up speed or not. In this case, it is – the year-to-date 3.5% increase in freight carload traffic for the first 28 weeks of 2014 compares to 2.2% for the first 24 weeks of the year. Some simple math tells us, the economy has indeed picked up over the last several weeks.
The second metric I mentioned was truck tonnage. According to the American Trucking Associations, trucks hauled 9.4 billion tons of freight in 2012, roughly 69% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. That makes trucking activity a key barometer of the U.S. economy. Each month the American Trucking Associations publishes its truck tonnage index and just like the weekly rail traffic report, it’s one I watch for each month.
Over the last few months, the data pointed to a pronounced pick up in the economy – the May tonnage index reading was up 3.3% year over year. Even though the June truck tonnage reading declined 0.8% month over month, the year-over-year comparison still showed an impressive 2.3% improvement. Through the first half of the year compared to the same period in 2013, the truck tonnage index is up 2.8%.
One of my mantras is to let the data talk to you, and if you’ve been listening to the insight offered by rail car loading and truck tonnage, you’d have a good idea where the economy is humming and how to invest accordingly. Last week, CSX (CSX) and Kansas City Southern (KSU) unveiled upbeat quarterly results. This week we’ll be hearing from Union Pacific (UNP), and given the tone of rail car loadings, it’s logical to expect upbeat commentary that player as well. Buried inside the commentary, we’ve heard of greater spending on rail cars and that bodes well for shares of Trinity Industries (TRN), American Rail Car* (ARII) and The Greenbriers Companies (GBX).
Put the truck tonnage and intermodal commentary together, and it bodes well for companies such as J.B. Hunt Transport Services (JBHT), which gets more than half of its revenue from intermodal shipments. As I have said before, booming rail traffic means more truckloads to and from the rail yard.
*Chris Versace owns no shares of any companies mentioned, but the Thematic Growth Portfolio that he manages owns American Rail Car shares.