Waiting for the shoe to drop

By James Aaron Cooke, Executive Editor -- Logistics Management, 9/1/2005

I'm not known for my stock tips. But five years ago, I moved all of the money in my 401K plan from stocks to bonds two weeks before the stock market tumbled. My fortuitous transfer of funds was precipitated by a report from a trucking executive showing that a drastic drop in U.S. freight tonnage had occurred that summer.

Logistics and transportation aficionados know that a decline in freight tonnage can be a harbinger of an economic recession. When companies stop moving freight because inventories have piled up, it's a sign that people have stopped buying and that manufacturers will slow production.

What happened in 2000 was that gas and diesel prices began rising early in the year; by October, oil prices exceeded $30 a barrel on tight supplies and worries of a cold winter. Squeezed by the high cost of fuel, consumers cut back on their spending.

At first, the market shrugged off the rise in energy expenses. In the middle of a huge business expansion fueled by the Internet frenzy, stocks hit record highs in the first quarter. But after a historic peak, the market began to slide. The deterioration accelerated in the fall, ultimately resulting in one of the worst stock-market declines in history and a recession that began the following March.

I bring this up because, frankly, I'm amazed that the economy keeps chugging along this summer. The price of oil has topped $60 a barrel, yet the economy seems resilient. Data show that income, employment, and corporate profits remain strong. The Federal Reserve Board continues to raise interest rates in the belief that the economy is solid. Unemployment dropped this summer to the lowest levels in four years, and not one reputable economist has uttered the dreaded "R" word.

Economic pundits don't seem worried, but as I listen to reports of the devastation caused by Hurricane Katrina, I have to wonder to what extent consumers will be able to absorb higher fuel costs without commensurate paycheck gains. It's not just higher gas prices that hurt the pocketbook. There's a ripple effect from rising fuel costs that impacts truckers, shippers, and ultimately the consumer. Since truckers pass on higher diesel prices in the form of fuel surcharges, shippers wind up paying more to move products to market. To maintain profit margins, companies raise prices, and the cost of meat, produce, and snack foods goes up at the grocery store.

Soon consumers are paying more for their food as well as more for gas and energy. Eventually they cut back on discretionary purchases, such as new furniture, home electronics, or dining out.

Anxious over higher oil prices, I've been watching for telltale signs that the economy is about to give way. Two such signs recently caught my eye. The U.S. Commerce Department reported that orders for durable goods tumbled almost 5 percent in July. More significantly, the American Trucking Associations (ATA) reported that its for-hire Truck Tonnage Index slipped by a small fraction—.2 percent—in June. Based on a survey of the ATA's motor carrier members, the index gives a picture of the volume of truck shipments in the economy.

Truckers typically move the most freight in late summer and early fall as retailers stock their store shelves for Christmas. If the index drops again in July and August, it could be a sign that history is repeating itself. Santa's sack might not be full of presents this year, and you might be wise to call your stockbroker for advice.