Beyond the Economic Horizon

Beyond the Economic Horizon

It’s tough for George Adams, president of SA Recycling in Anaheim, Calif., to see much good about the global trading economy when scrap steel exports are down 30 percent this year. But he believes he may have seen some hope on the horizon.

“China was buying in March,” he said.

That’s especially important, Adams said, because scrap steel, the feedstock for about 40 percent of global steel production, may be an early indicator of a global economic recovery. With China’s national stimulus program focusing heavily on infrastructure development, new scrap purchasing may bolster Adams’ view that the economic downturn could hit bottom by the end of 2009 and start growing again.

He’s one of a world of shippers, carriers and economists poring over reports of the movement of goods from industrial commodities to parcel shipments for signs of the leading edge of a recovery.

The problem with the sales and transportation numbers is they are lagging indicators, and the news is almost all bad. But some leading long- and medium-term indicators tell a different story: There may be a hint of a turnaround, even if it is nowhere near the station yet. Even some lagging indicators suggest glimmerings of a recovery because they are dropping at a less precipitous pace.

“We’re not there yet, but we’re getting close to the bottom of the cycle globally,” said Nariman Behravesh, chief economist of IHS Global Insight, the Lexington, Mass., economic forecasting firm.

“For a while, every economic indicator was plummeting. Now that’s no longer true. Some indicators are either flat, or coming up a little bit. Others are still falling, but typically at a decelerated rate. These are all early indicators that we are approaching a turning point.”

He said indicators for purchasing managers, housing and consumer spending all are turning up in the U.S. and Europe, but not in Japan. “I think Japan is still in trouble, but China looks like it’s ready to come back,” he said.

One indicator is the index of the price of raw materials used in global industrial production compiled weekly by The Journal of Commerce and the Economic Cycle Research Institute, a New York economic research firm that follows a set of some 200 economic indicators that can predict the direction of the U.S. and global economies.

“The JoC-ECRI Industrial Price Index is showing that the downturn in global industrial activity is bottoming out,” said Lakshman Achuthan, managing director of ECRI.

“The index has a larger cycle than the global economic cycle, so when it is up, it is higher than global economic growth, and when it is down, it is a much deeper downturn. The growth rate of the index peaked at nearly 30 percent in May 2008, with a secondary peak in July, and then slid all the way down to minus 70 in December 2008.

“That’s a huge swing,” Achuthan said.

Last week the index showed a negative growth of 57 percent, or a 13-percentage-point recovery from its bottom.

Other indicators of the basic foundations of industrial production also are giving signs of hope.

The Institute of Supply Management’s closely watched Manufacturing Index remains at historically weak levels, but the 36.3 percent reading in March marked the third straight month of growth and the ISM’s index for new orders jumped 8.1 percentage points. The reading there of 41.2 percent is the highest measure in seven months.

The price of lumber used in home construction has been largely stable this year at rates 20 to 30 percent behind the comparable period of 2008. But the National Association of Home Builders said the average price of framing lumber grew from a low of $190 per 1,000 board feet the week of Jan. 30 to $202 by April 3. The price on the lumber futures market grew 30 percent in that time.

But the best sign may have been the U.S. Commerce Department’s announcement that factory orders grew 1.8 percent in February, the first increased in seven months.

Such reports suggest an economy that was hemorrhaging in recent months has stabilized. Now, Achuthan said, the question is whether “we’ve hit a ledge or the canyon floor. We hope it’s the canyon floor and that there’s no more to fall.”

But experts say it also is becoming clearer that a recovery is likely to take a far different shape from any economic rebound seen since World War II. Generally, the U.S. consumer has been the engine of growth, not only of the U.S. economy, but also of the global economy. This time, economists believe a fundamental shift is under way that suggests U.S. consumer demand for retail goods made in Asia may not return soon to levels that spurred huge volumes of container shipping in recent years.

“The days in which consumer spending by home equity, or increases in wealth or increases in debt are behind us,” Behravesh said. “American households have learned the hard way that they cannot continue to run up the kind of debt that they have been running up or count on the kind of equity withdrawals that they have been using to fuel consumption.”

February numbers bear that out; consumer credit, led by a sharp decline in credit card use, fell 3.5 percent, to $2.564 trillion, according to the Federal Reserve. Revolving credit, which includes credit card debt, tumbled 9.7 percent, to $955.7 billion.

With individuals more focused on saving than spending, Behravesh said retail consumer spending as a percentage of GDP is likely to fall from 70 percent to 65 percent. “It will take a while, maybe 10 years,” he said. “Correspondingly other countries are going to have to shift in the opposite direction to rely more on their own consumers rather than the U.S. consumers.”

U.S. exports of capital goods will likely have to make up the difference to maintain expansion of the U.S. economy. “Where the other parts of the world have to become less dependent on exports, we will have to become more dependent for a while on exports,” Behravesh said.

That may mean a network of distribution centers and transportation nodes built to serve inbound logistics may undergo a shift to look outward.

But another result of the recession may be that the potential growth rate the U.S. economy can maintain will ratchet down from past recoveries. That will make the economy more vulnerable to storms that can drive it into recession. “We are seeing a cycle where the size of the swing is much bigger than anything we’ve seen,” Achuthan said.

In each of the expansions that have followed recessions since World War II, the growth rate of the U.S. economy has leveled out at a progressively lower level.

“What was a 5 to 6 percent trend growth rate right after the war dropped to 3 to 4 percent in the ’80s and ’90s. It’s now a little above 2 percent trend growth,” Achuthan said.

The data for cargo movements globally are showing few signs of life. But they do show a flattening out of their precipitous decline over the last year.

“If you look at the domestic data for January through March, the volumes bounced around a little bit, but the year-over-year trend did not deteriorate meaningfully,” said Jon Langenfeld, associate director of research at Robert W. Baird, a Milwaukee-based investment firm. “There is the sign of the bottom, whether you look at Asian port indices, railroad cargo data domestically, or freight activity on the truck side domestically. That’s to us a sign that things have bottomed, although it’s still very, very weak levels.”

Of course, it may be that the numbers at the end of 2008 were so bad that even a

10.7 percent decline in rail intermodal container traffic in the last week of March looks good because that business has been off more than 20 percent in some previous weeks.

“What you can’t find is data that say things are getting worse,” Langenfeld said. “November, December, everything was stacked against us, and I saw the highest levels of uncertainty I’ve ever seen. Now, with the easing of credit constraints and uncertainty, things should be getting better.”

He said the stabilization of container ship layups in March and reports that some idle ships are coming back on line are encouraging signs. “Anecdotally we’ve heard comments that suggest maybe intra-Asia trade is picking up a little bit, and in the last couple of weeks here even on the domestic front there are some signs that things have gotten a little bit better,” he said.

Behravesh said signs of recovery are being nourished by the stimulus packages being injected into economies, especially in the U.S. and China, and to a smaller extent in Europe. “That stuff is starting to work, so I think we’ll see the true payoff in the second half of this year,” he said.

“The data suggest that the headwind of trade is starting to dissipate, so if something else is happening domestically in a country that might help it, it will have less to fight in the months ahead,” Achuthan said.

One of the more esoteric leading indicators ECRI follows is showing signs of a potentially strong recovery in the second half of this year. The Financially Related Diffusion Index, or FRDI, is capturing the positive impact of added liquidity and falling prices and how that combination will support industrial growth going forward.

“The FRDI is now at a record high,” Achuthan said. “That’s telling us very convincingly — it doesn’t get more convincing in our world — that there will be a turn in the growth rate of global industrial production in coming months.”

Some shippers, however, would be more convinced if China ordered more scrap metal.

Contact Peter T. Leach at  Beyond the Economic Horizon.