What is Freight Telling Us About the Economy?

Back in June 2015, I posted an article that looked at the Transportation Services Index or TSI, a broad measure of America's transportation services which includes the monthly changes in both passenger and freight transportation.  The freight component (the freight TSI) includes freight that moves by highway, rail, air, water and pipeline, the main subject of this posting.  The most interesting aspect of the Transportation Services Index is that it functions as a leading indicator of the strength of the economy, that is, a deceleration or decline in the index is predictive of economic downturns.  Let's look at the most recent index and take a closer look at what has happened to rail traffic over the past year.

As background, a 2009 study which was updated in 2014, by Peg Young and Ken Notis at the United States Department of Transportation showed that, over the past three decades, the freight TSI showed either a deceleration or decline at least four to five months before economic downturns as shown on this table:

In the case of the Great Recession, the freight TSI showed a decline or deceleration 18 months prior to the start of the last major recession.  This makes common sense; as consumers and businesses start to reduce their spending, the amount of freight movement that is required to satisfy consumer and business demand either remains steady or falls, slowing economic growth levels.

Now, let's look at what has happened to the freight TSI since 2000:

Let's focus on the period from 2006 on:

You can easily see how the freight TSI dropped substantially during the Great Recession.  You can also see how the freight TSI peaked in mid-2006 and again right at the beginning of the latest recession in January 2008 but grew very little over the period from late 2004.   As the economy began to expand in mid 2009, the freight TSI began to rise and continued its climb until the end of 2014.

Now, let's focus on the period between between the beginning of 2014 and February 2016:

Basically, the level of the freight TSI has been decelerating since November 2014 and is starting to resemble the pattern shown prior to the Great Recession when there was a significant lead time between the deceleration and the start of the last recession.

Let's look at one key component of the freight TSI, the freight that is moved using rail.  The U.S. Department of Transportation sources its rail data for the freight TSI from the Association of American Railroads.  In its latest weekly rail traffic report, the AAR reports the following for the month of April 2016:

1.) Carload traffic in April totalled 944,339 carloads, down 16.2 percent or 180,598 carloads from April 2015

2.) Container traffic in April 2016 totalled 1,028,460 containers and trailers, down 7.5 percent or 83,729 units from April 2015.

3.) Five of the 20 carload commodities saw gains over April 2015; miscellaneous carloads were up 25 percent, coke was up 16.1 percent and chemicals were up 1.5 percent.  Commodities that saw year-over-year declines included coal which was down 39.7 percent, petroleum and petroleum products were down 25.1 percent and grain mill products were down 7.1 percent.  

4.) Total carload traffic for the first 17 weeks was down 14.3 percent compared to the same period in 2015.  

5.) For the first four months of 2016, total rail traffic volume in the United States was 8,455,752 carloads and intermodal units, down 7.8 percent or 715,985 carloads and intermodal units from the same point last year.

The rather significant drop in rail traffic and the deceleration in the growth of the freight TSI certainly give us a sense that the economy is likely to continue to slow or remain rather stagnant for the foreseeable future, an economic reality that became evident with the release of the first quarter GDP data.

The Freight Transportation Services Index and Future Economic Growth

Updated October 2015

Nearly a year ago, I posted an article that looked at one of the very few leading economic indicators that can be used to give us a sense of the economy's direction.  Rather than using trailing indicators like consumer spending, the housing market or employment that provide us with data that is already at least a month old in most cases, this indicator tells us where the economy is headed rather than where it has already been.

The Transportation Services Index or TSI is the broadest measure of United States domestic transportation services and reflects real monthly changes in both passenger and freight transportation services within the U.S.  It includes three components; a freight index (the freight TSI), a passenger index (the passenger TSI) and a combined or total index (total TSI).  The freight component of the TSI, which includes five modes of transportation (highway, air, railway, waterway and pipeline), appears to show a very close relationship with the pattern of national economic growth.  The TSI includes only domestic for-hire transportation that is operated on behalf of or by a company that provides freight or passenger transportation services to external companies for a fee.  Not included is transportation in vehicles owned by private firms providing services to that firm, taxis and intercity bus services and noncommercial passenger travel which includes trips in the family car.  The for-hire component constitutes roughly 60 percent of total national transportation services.

Here is a table showing the data sources for the TSI:

A 2009 study (updated in December 2014) by Peg Young and Ken Notis at the United States Department of Transportation observed that the Bureau of Transportation Statistics freight Transportation Services Index (TSI) showed a decline or deceleration a full 18 months before the start of the Great Recession.  This suggests that the TSI may, in fact, prove to be a useful indicator of economic downturns.  In addition, on average over the past three decades, the freight TSI turned downward 4 to 5 months before the broader economy began to slow as shown on this table:

Here is a graphic showing the changes in the freight TSI since 1979 and economic cycles (shaded grey) over that period with the turning points (or decelerations) noted as month and year:

Now, let's look at the freight TSI data from January 2000 to July 2015:

It's quite clear that since November 2014, the freight TSI has plateaued and is showing signs of declining.  At the very least, its growth trend from the end of the Great Recession in June 2009 has ended.

Here is a closeup of the data over the past year:

The previous curve looks substantially different than it did over the period between July 2013 and July 2014:

If the authors' analysis is to be believed, it certainly looks like a deepening economic slowdown could be in the cards, an issue that will have a significant impact on whether or not the Federal Reserve is able to launch its program of rising interest rates.  

Moving Freight - A Leading Indicator of Economic Health

There is an interesting leading economic indicator that gets very little attention from the mainstream media.  Most often, the mainstream media uses a combination of employment, housing and manufacturing data to give us a sense of where the economy is headed, however, this data is trailing the economy, that is, it is released after it has happened and provides us with relatively little sense about where the economy is headed, rather, where it has been.

A study by Dr. Peg Young and Ken Notis back in 2009 looks at using the Bureau of Transportation's Freight Transportation Services Index (TSI) as a predictor of where the economy is headed.  The TSI is the broadest monthly measure of United States domestic transportation services and provides the best possible measure of these services which includes real monthly changes in both freight and passenger transportation services across America.  The TSI includes only domestic for-hire transportation that is operated on behalf of or by a company that provides transportation services to an external company for a fee.  It does not include transportation in vehicles used in the private sector (i.e. car trips taken by families).

Here are the five modes of transportation that make up the Freight Transportation Services Index:

The authors noted that both accelerations and decelerations in the freight TSI are strong leading indicators of the health of the economy.  Here is a graph showing the freight TSI between January 2000 and February 2009:

The blue line shows the actual freight TSI and the red line shows the smoothed freight TSI.  The Great Recession officially began in December 2007.  Looking at the freight TSI numbers, we can see that the deceleration began in either January 2005, November 2005 or May 2006.  According to the rules used by the authors, the peak month for the freight TSI would have been in May 2006, a full one year and six months before the beginning of the Great Recession.

Over a three decade period from the late 1970s to 2009, the freight TSI led economic downturns by an average of four to five months with a range of one to seven months.  The authors explain the longer than average eighteen month lead in the decline of the freight TSI before the Great Recession took hold on the unique aspects of the latest recession, particularly its magnitude and the financial crisis that preceded it.

Now, let's look at the freight TSI from 2000 to October 2014 from the Bureau of Transportation Statistics website:

When we look at the data over the nearly 15 year period, the deceleration or plateauing in the growth level of the freight TSI between mid-2004 and mid-2008 is quite obvious.  It is also somewhat less obvious that the freight TSI looked to be decelerating slightly between the end of 2011 and the third quarter of 2012 as shown on this graph:

If you look at this bar graph that shows GDP growth rate, you'll note that during 2012 the economy grew at a much slower rate in the last half of the year, reaching a low of zero percent in the fourth quarter of 2012:

In this case, the freight TSI predicted a downturn about one fiscal quarter ahead of the economic slowdown.

Looking at the period between January 2013 and October 2014, the latest month for which data is available, we see what might be signs of a deceleration in the growth rate of the freight TSI over the past three months as shown on this graph:

With the authors' conclusions in mind and the freight TSI data showing no sign of decelerating, it doesn't appear that this leading indicator is predicting an economic slowdown at this point in time.  That said, given that history has shown that the indicator can lead the economy by as little as one month, the freight TSI should be watched closely if it begins to show a pattern of plateauing.