Where is the Economy Heading? Follow the Transports.

Have you ever wanted to read a crystal ball, read the tea leaves, consult an astrologer, etc. to find out what the direction of the economy is going to be?

Well, you don't have to go that far. You can have something much, much more concrete.

Some months ago on Jim Canale's Real Estate Lifestyle website forum, I wrote about the troubles that YTC, the former Yellow Transportation was going through with lower shipping volume and higher fuel costs. The CEO was making the case that the Fed did indeed need to lower interest rates because the economy was at the beginning of a period of increased inflation AND lower economic output. Well, today FedEx came out with lowered expectations on future profits because of....you guessed it, lower shipping volume and higher fuel costs.

Lower shipping volume indicates that there are not as many goods being produced by manufacturers which leads directly to lower profits for everyone. When combined with higher transportation costs, profits all around drop for everyone. The transportation companies, the manufacturers, and the financials. The financials get hit because if their is less economic output, companies are less likely to borrow for expansion that is not needed.

This has been reflected by the drop in the Dow Jones Transportation Index which has fallen some 950 points since its July high to 4563.84. A 17% drop! This is much greater than the 7% drop in the Dow Jones Industrial Average.

So, follow the transports as a leading indicator on the economy.

For now,

Notes from the Underground:
DJIA - 13,176.94 +66.74
Gold - 793.60 -19.40
Silver - 14.483 +0.031
Oil - 95.10 +1.67

Dow Jones Transports - 4,563.84 -74.85

Patrick