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Friday, May 08, 2009

End of Week Roundup

I didn't find the employment report very encouraging, unfortunately. The segments that are picking up a lot of job cuts right now (business & professional svcs & wholesale trade & transportation) are well-paying jobs. The two-month rise in male unemployment and the doubling in the college-educated unemployment rate over a year isn't encouraging either.

On the brighter side, the overall unemployment rate is being pushed up by people looking for jobs. The darker side of that is that discouraged workers and the long-term unemployed are at very high numbers, so the increase in the workforce appears at least partly due to people who have not been working going back into the workforce in an attempt to shore up household finances.

The level of diffusion shows that unemployment rises should at least start to slow over the next few months. However some of these industries could continue to cut for quite some time.

Rail for April
: Dismal. No other word for it. This is a new downward trend for rail, which had dropped steeply in December, but showed some very slow signs of life in the early spring. However, there is now another clear step down which has been maintained for over a month. On a YoY basis, carloads in April fell 23%. Intermodal (more associated with retail) fell 17.9%. In March, carloads were down 17.3% and intermodal was down 14.9%.

For YoY 09 so far (including April!), carloads were down 18.2%, and intermodal was off 16.2%. So this is a strongly unfavorable shift in trend.

Railroads are laying off significantly and sidelining rolling stock. April's performance inspired a bit of sarcasm in the news release, whereas in March there were still hopeful complaints about weather:
“Unfortunately, it’s hard to find much in rail traffic data in April to support the idea that the economy is starting to see ‘green shoots’ — it may still just be weeds,” said AAR Senior Vice President John T. Gray. “
One component of rail traffic I have been watching intently are metals. Metals and metal products were down a staggering 62.1% in April.

Metals will pick up when things are starting to improve or when wholesale inventories begin to clear (which will cause a marginal improvement in economic activity).

After a short divergence (probably caused from a shift back from rail to trucking due to lower diesel costs), rail and truck freight have resumed their parallel course. Trucking data comes out later, so one can usually use rail to forecast trucking. March trucking was very unfavorable, and it seems extremely likely that April trucking will be down again based on rail:

No green shoots there. The port data I have seen is generally consistent with the trend of rail and truck for the last two months.

So, where are we in the process of clearing wholesale inventory? I have recently read some chipper commentary on this subject, but the crucial factor is less absolute declines in inventory than ratcheting down the inventory/sales ratio:
No green shoots there. Not even weeds. Maybe April data will show more of a correction, but it looks like we are a few months away from getting back to the crucial 1.25% ratio range.

I don't normally spend much time with the ISM monthly reports (the reason is that I view the data as generally coming from too high up in the executive chain to be truly solid) but when I am looking for green shoots I do look at orders and inventory sentiment for the non-manufacturing (what used to be services) segment. The reason is that services is an amplified mfrg index, and this may flag a turning point.

April's ISM NM
I had some good and some bad. Export orders, while still in the negative range, clocked a hefty 9.5 increase to ascend to the dizzying heights of 48.5. That looked very green-shooty. However overall inventory sentiment got worse, moving from 60 to 62.5 (too high). It's possible those little green thingies in the export orders are actually nutsedge sprouts.

ISM Manufacturing for April had the same mixed picture. Customer inventory actually switched direction from too high to too low. However, exports are still contracting, supplier deliveries are faster and employment is still contracting.

Now, one of the reasons I am wary of ISM and reports like this is real-world business experience. When there is a downturn, the pressure is on the sales department. And they always believe their customers need more. It is their professional duty to believe that. Nor does the head of the sales department have any motivation to put the lid on the wheeling and dealing; most often they facilitate it. Any halfway good salesman will be able to chalk up some long future sales contracts by offering some price cuts, free freight, etc, but the contracts may well really be contingency sales which are apt to vanish into the mist.

Thus when you see shipments falling, revenue falling, employment falling and orders rising, the wise commercial lender will ask to see the contracts, delivery dates, and contingencies before advancing any money on the strength of those sales figures. So color me skeptical, which is a sort of ecru.

What's indubitable is that overall ISM sentiment dropped massively from December according to the biannual survey. These are the bullets from the survey:
Manufacturing Declines in 2009
Revenue to Decrease 14.7%
Capital Investment to Decrease 22.7%
Capacity Utilization at 67%
Non-Manufacturing Also Declines in 2009
Revenue to Decrease 5.1%
Capital Investment to Decrease 13.5%
Capacity Utilization at 80.1%
This showed a striking negativity compared to December, a change in sentiment which implies that even the nutsedge is going to have a hard time growing for a few more months. The predictions here would be consistent with much slower declines for the rest of 2009, but continued declines.

Most striking in the overall manufacturing report are that only food, beverages and tobacco execs expect an increase in revenue, and that capacity utilization is at the lowest reported levels ever (numbers begin in 1985).

By far and away the brightest indicators I can find are this spring's NACM reports. February through April showed overall improvements as in "the slide down the cliff is slowing". What I have been looking for, which is healthy improvement in credit apps and credit extended for mfrg, I did not see until April. In April, manufacturing showed a stronger pulse, with a nice 6 point pop in new credit apps and even a return to December levels for credit extended. To put this in perspective on a YoY basis, April 08 credit extended was at 57.7, while the improved performance in April 09 amounted only to 44.1.

However services was very disappointing. Credit extended in services continued to drop in April. When business activity improves, B2B credit improves with it. When manufacturing improves, it improves in fits and starts and segments, not all at once. When that improvement moves through the system enough, the services B2B will improve.

From looking at the NACM reports, my hunch is that I am seeing the effect of the weaker firms going out of business. In this business environment, that has to happen before overall activity and investment improves. NACM is at least consistent with green shoot potential in later Q3 and maybe Q4. Overall, the business to business credit indication is that services are still contracting quite sharply while manufacturing appears to be maybe stabilizing a bit, with some companies or segments emerging as winners.

Now, when NACM and ISM give me conflicting pictures, I am going to go with NACM every time. That's because NACM is about hard money. The people reporting on this survey are people whose jobs are all about not losing money, rather than executives who are generally going with the general flow and apparently sometimes a little too far up the corporate food chain to know what is actually happening on the ground.

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