As a graduate student, I would occasionally visit the hotel for a drink with friends. It has a quiet atmosphere and, at least until the UK went smoke-free, a lovely cigar bar where you could order a glass of cognac, which would arrive with a free tower of finger sandwiches–an enticing deal for students.
A few years ago, I read a story about this same bar that caught my eye. Reportedly, a trader working in the City walked into the bar one Friday evening, slapped down his American Express and informed the barman that he would be buying drinks for everyone. He asked only that the barman inform him every time he’d spent another 10,000 pounds (USD15,000). This went on for several hours until he’d reportedly spent well over USD150,000 on drinks.
Apparently, this trader had correctly anticipated a key economic data release that same Friday morning. As anyone who watches the markets knows, stocks and bonds typically move quickly in the immediate aftermath of a key economic data release. He’d made millions by betting correctly on the news.
Each week governments around the world release economic statistics. Most weeks, there are at least a few considered to be major, market-moving events, and you can be sure that billions of dollars are made and lost by traders trying to predict if a key report will be a bit better or a bit worse that the “consensus” view. These subtleties are then endlessly hyped on various financial websites and news channels; I am often amazed at the extreme conclusions some pundits manage to draw from a single data point.
For longer-term investors who weren’t lucky enough to be at the Dorchester that Friday evening, this is all white noise. Trends, not single data points are the key for most investors. In Personal Finance Weekly, I spill considerable ink each week analyzing these trends and comparing current economic conditions with other historical periods.
But it’s also useful to look beyond the handful of government statistics that are widely discussed in the media and anticipated by traders.
Two indicators I watch carefully are data on carloads from the Association of American Railroads (AAR) and data on credit card delinquencies reported by card issuers such as American Express (NYSE: AXP) and Discover Financial Services (NYSE: DFS). These data releases won’t spark the same trading action that accompanies a government report, but they often provide a clearer picture of economic conditions.
The AAR’s carload data is relatively straightforward; each week the association reports the number of freight rail cars loaded in the US. Freight rail is the lifeblood of the US economy, transporting a wide range of goods, from commodities such as coal and iron to industrial products and consumer goods.
When the economy is doing well, demand for these products rises, along with freight volumes. In my book, that’s a much more interesting statistic than whether consumer spending in July rose 0.1 percent more or less than expected. Here’s a look at the data.
Source: American Association of Railroads
Many economic data points released by the US government are seasonally adjusted to account for major holidays and other recurring factors that could skew results.
But seasonal adjustments are far from perfect and can create discrepancies. For example, the shutdown of automobile factories this summer didn’t follow the “normal” pattern, and many economists believe this anomaly has significant ramifications for weekly jobless claims data.
The AAR doesn’t adjust its data in this manner. To create this graph, I did eliminated Christmas week from the data because freight volumes always fall sharply that week, obscuring the overall trend.
As you can see, this data offers a useful picture of economic conditions. For much of 2008, carloads held up reasonably well, but when the economy hit the proverbial wall in autumn, volumes collapsed and remained at depressed levels well into 2009.
But the data began trending upward in mid-2009. Earlier this summer the AAR reported weekly carloads of more than 300,000 for the first time since 2008. The improvement has occurred gradually–economic recovery has been sluggish–but the trend is undeniably positive.
The collapse in global credit markets turned the economic downturn of 2007-09 into what some are calling The Great Recession. Investors can scrutinize a number of data points to evaluate the strength of the credit markets, but delinquencies reported by credit-card issuers often get lost in the shuffle. If consumers are struggling to make ends meet, expect the number of borrowers more than 30-days late on card payments to tick up. The amount of bad debt that credit-card firms write off also tends to head higher.
I prefer data from American Express because its cardholders tend to have above-average credit profiles; if AMEX users have a cold, you can bet some of the other credit card firms have pneumonia. Here’s the data.
Source: American Express
The data I watch most closely is the percentage of AMEX cardholders who are 30 days late on a payment because this figure leads write-offs.
Credit quality deteriorated markedly about three years ago. At the beginning of 2007, roughly 2.6 percent of AMEX cardholders were 30-days late on their payments, a normal level of delinquency. By the end of the year this figure had jumped to 3.2 percent; by the mid-2008 it was already at 3.7 percent. This was a good early warning of trouble ahead.
Another worthwhile indicator is the total size of the company’s US portfolio. At the end of 2006, cardholders had racked up $66 billion in outstanding debt; by early this year the total was down to less than $50 billion. You couldn’t ask for more compelling evidence of a contraction in consumer credit and spending.
Credit trends appear to be improving. At the beginning of 2010, AMEX reported that roughly 3.7 percent of its cardholders were behind on their payments, but delinquencies had plummeted a full percentage point at the end of June. Write-offs were also down substantially.
The latest data also suggests that the contraction in consumer credit appears to have stopped or at least slowed down. At the end of February, AMEX borrowers had $49.2 billion in outstanding debt; the portfolio has hovered around $49 billion ever since.
Both credit data and carloads point in the same direction: The US economy is experiencing a weak, subpar and lumpy recovery from the 2007-09 recession. It will be a long time before activity returns to pre-recession levels, but the economy isn’t at risk of slumping into another recession.
Meet Me in San Francisco
Seven years ago I spoke at my first MoneyShow at the Marriott in San Francisco.
Although I did a bit of public speaking in graduate school, I must admit to being a bit nervous the night before my presentation, though an outstanding dinner and a few glasses of wine at Masa’s Restaurant steadied my nerves.
I was assigned an odd room featuring a massive concrete post located just in front of the podium, but the session went well, and I’ve thoroughly enjoyed speaking at dozens of shows and events around the world in the years since. As the site of my inaugural presentation, the San Francisco MoneyShow has always been special for me.
I fly out next week with Roger Conrad and David Dittman to speak at this year’s show, which runs from Aug.19-21. It’s free to attend as our guests, so be sure to join us. And don’t worry–these days we get much better conference rooms.
Even better, The Rise of the State: Profitable Investing and Geopolitics in the 21st Century, a new book I co-wrote with my colleagues David Dittman and Yiannis Mostrous, will be available for sale at the show. And David and I will host a book signing at the show. If any Personal Finance Weekly readers plan to attend, be sure to stop by and pick up a signed copy.
If you’re interested in the book signing, drop me an email (personalfinanceweekly@kci-com.com); I’ll forward the details as soon as our publisher provides them.
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