- The Washington Times - Friday, January 22, 2010

The recent rash of economic data since the start of the New Year has reignited concerns over the strength of the current economic recovery. With initial jobless claims trending higher in recent weeks, producer prices continuing to move higher, fuel prices up significantly year on year, and other indicators suggesting there is ample slack in the domestic economy, it comes as little surprise that the stock market has receded from recent levels.

Driving that retrenchment is a growing number of investors questioning how vibrant the near-term economic outlook is and those aggressive earnings expectations that I discussed in recent columns. Last week, I touched on what the expected gross domestic product (GDP) should be for the December quarter, both with and without the effect of the White House stimulus package. While the consensus calls for the private sector to cross into the black in the December quarter, are we seeing signs that signal strong sequential growth in the private sector will continue?

There are a number of leading economic indicators that investors use to gauge whether the economy is accelerating or decelerating. Examples include average weekly work hours, jobless claims, and consumer sentiment and expectations. There are also coincidental indicators, or economic factors that vary directly and simultaneously with the business cycle. Examples include nonagricultural employment, personal income and industrial production. By comparison, lagging indicators confirm long-term trends, but they do not predict them. Some examples are unemployment, corporate profits and labor cost per unit of output.

Looking back over the past few weeks, the data, at least in my view, do not suggest vibrant economic activity, but let’s take a closer look. Freight transport companies, like Burlington Northern (NYSE: BNI) and Union Pacific (NYSE: UNP), carry a variety of goods - from autos to lumber, petroleum, coal, chemicals and more. As such, their business makes them “early cycle” plays during an improving economy. CSX, another rail transport company, reported its December quarter results earlier this week and its total volume for the quarter was down 7 percent, year on year. Those volumes were strongly affected by a steep drop in coal traffic, and declines in forest products, food, consumer and metal volumes.

Because rail and truck traffic tend to be early indicators, I keep an eye on those companies as well as traffic and tonnage data from the American Association of Railroads (AAR) and American Trucking Associations (ATA). Much like rail freight, trucking serves as a barometer of the U.S. economy. It accounts for nearly 69 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

Recent rail data, in my view, do not paint the picture of a vibrant economic recovery. Per AAR data for 2009, total carloads carried by U.S. railroads fell 16 percent compared with 2008 and are at the lowest levels since 1988. Earlier this week, the AAR reported that freight rail traffic is off to a slow start in 2010, with U.S. railroads originating 236,796 carloads for the week ending Jan. 9, down 12.4 percent compared with the same week in 2009 and down 28 percent from the same week in 2008. Total volume on U.S. railroads for the week ending Jan. 9, 2009, was estimated at 25.5 billion ton-miles, down 12.4 percent compared with the same week last year and down 25.9 percent from 2008.

Weak traffic and tonnage suggest that business activity and new-order activity remains weak and, as such, I think we will continue to see a struggling job market. After all, unless a company has a growing order book, it’s not likely to add incremental workers, but rather try to squeeze greater productivity from its existing work force. As I noted last week, we have yet to see any meaningful increase in average workweek hours or overtime hours.

As more companies across more industries report their December quarter results in the coming days and weeks, they will be offering either a view on the current quarter or perhaps an outlook for 2010. I suspect we will continue to hear more sobering views that will weigh on the stock market as those aggressive earnings expectations are revisited. While some may panic, a more disciplined investor will use any pullback in the market to spot opportunities. After all, that is what the smart money did last March.

Keep your eyes peeled and your ears open.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@ washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.



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