Monday, July 11, 2011
Rail, And June Ain't Over
Let's see - the comment on auto production over the summer - the long term trend is down, I agree, but in July there should be a bend up and the first week seems to show it. Inventory in light vehicles is split. Some popular models and smaller cars still have sparse inventory, and truck inventory seems to mostly be too high in relation to sales. But the last week's rail did show MV arcing up a bit. It will be on cars and it won't last for long, but there will be a bit of a pop.
However, the monthly rail report for June shows that not only have carloads confirmed their loss of YoY growth, but now intermodal is on the declining path.
Intermodal is showing a shift down. This may not look like much, but intermodal absolutely should have risen in June. Believe me, it just does.
Fuel costs had seemed to move traffic from trucking to rail earlier in the year, so the overall economic trajectory is worse than this looks.
Friday's industrial production will be interesting! Looking at coal shipments hints that it may be down overall.
The last ATA tonnage index is for May, which showed a rapidly declining YoY gain along with the continued seasonally adjusted month-over-month drops.
It looks like US imports are dropping, which may help Q2 GDP. But it also looks like goods are pooling in inventory. The way GDP is figured, an inventory build is a plus. But considering the traveling wave for the economy, an inventory build is a negative.
Now again, when you look at the freight/industrial axis you have an eerie, but unfortunately negative consistency:
- Diesel supplied consistently down over 3% YoY (last four week MA reported at -5.4%).
- Coal down in June 1.5% from May on an SA basis. That implicates utilities.
The main reason why carloads are such a very strong US production-side indicator is because of coal and utilities.
No, this isn't because we suddenly went green! Over time, maybe. Not this sudden move.
- Trucking bad.
- Decisive bends on the order backlogs index for a range of PMI/production/business climate surveys.
- The slowing shown on services surveys.
All of this leads me to say that growth trends in the third quarter have to be worse than growth trends in the second quarter.
The progression was:
1) Consumers buckle.
2) Small service/retail buckles.
3) Inventory pools a bit, and money does.
4) Large service weakens. (started in May, kind of obvious by June, look at backlogs and inventories.)
5) Manufacturing buckles (just beginning - that's what the order backlogs tell you).
So what happens in August when manufacturers start slimming and trimming? Then we get bounceback effects as the tightening starts to send reiteration pulses back up to step one! Small businesses react to these changes very quickly, but big businesses are far slower to shift gears. They do, however. I would say service businesses began that process in June.
The June drop in temp jobs was far more decisive than in May, but it does tell you that we have entered the negative feedback cycle for a portion of the economy. We do seem to be falling out of the stall speed and into choppy near-surface air, and the aerodynamics are not favorable.
The outlook for state and local consumption is not favorable; May's poor retail report and June's likely followup means that real growth in state incomes is likely to fall out in the second half. Barring the deployment of assassination squads to off rich people to get estate tax receipts up, there doesn't seem to be a blue sky for financing governments. With current trends, they are chopping, because total receipts are still very much below 2008 levels and the retirement crunch is well underway for government workers. With even a minor negative shift in income trends, they will be forced to chop more. These inflation rates impose high costs on governments also.
Ten refiners in China, Japan, South Korea and Taiwan turned down the Saudi offer, traders said on Monday, as oversupply of high-quality Russian ESPO crude prevails in the region and China's crude imports tumbled 11.5 percent in June from a year earlier to their lowest in eight months.
If we devour the dollar, energy costs kill us. If
we don't devalue, we can't move our imports.
Something has got to give.
I did see the June Chinese numbers, and given that we are running YTD total imports down 9% last year, it is highly implausible that prices are being driven by tight supply.
I'll be honest and say that I think oil is being used as a hedge for currency worries and because so many trades look negative.
We do have an oversupply of money, and it has to go somewhere.
It also doesn't look as if an orderly revamp is in the cards.
Been busy lately. My consulting practice got a little crazy this summer. Seems my clients A)have more time on their hands to think about intractable problems that they've been worried about for a couple of years now and B)are concerned that they're going to lose chunks of their R&D budget in the next fiscal year. We've got money now, let's blow it on Neil!
I've made my year already (only 6 months in!), but I don't think it's gonna happen next year.
Perhaps you should substitute the word "invest"?
That's great. I am hoping this downturn will be a lot less vicious, and that some of the R&D and reindustrialization will proceed along, albeit at a slower pace. The consumers are going to have their heads ripped off and be disemboweled alive, but I am hoping some of the industry can pace through.
I am panicking about Europe, though. Italian 10-years moved up to almost 6% yesterday, and after that it is hard to come back.
I don't think the big Italian banks will be solvent by the end of August.
I am very busy too. We have a paradoxical economy right now.
Don't see it in your charts though.
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