In the classic book, The Hobbit by J.R.R. Tolkien a thrush lands on the shoulder of Bard the Bowman and speaks in a language he can understand. The bird tells Bard to watch for the dragon’s weak spot, a chink in his armor in the hollow of his left breast. Bard looks, sees the open patch, and lets fly his last arrow. It plunges through the chink in the dragon’s armor and buries itself in his heart. The dragon comes crashing down, a dramatic death to the evil Smaug.
In the past couple of months it has become apparent to me that there are a couple of chinks in the U.S. economy’s armor that will likely mean recession is ahead sooner rather than later. Hopefully, it will not be a dramatic event, but more like the slow leak from a deflating helium balloon.
I can hear it now from some of my readers. “Here he goes again. Doug is always so negative!” Sorry, but if I learn something that’s important I report it, even if it isn’t what my readers want to hear. Whether you believe it or not this column isn’t about me. It’s about you. It’s about providing valuable information to my readers so they can make informed decisions.
What are the chinks in the U.S. economy’s armor? 1) A decline in factory output; and 2) A decline in transportation activity. As Tony Sagami of Mauldin Economics said in a recent article, the two most basic economic building blocks of the American economy are the makers (manufacturing) and the takers (transportation).
Here are some recent facts about factory output in the United States that should give us pause for concern:
- The Institute for Supply Management released its latest survey. It showed its weakest reading of industrial output since April 2009.
- Business inventories increased 5.4% year-over-year, which is the fastest back-to-back quarterly rate on record.
- U.S. manufactured exports decreased by 2% to $298 billion in the second quarter, as compared with 2014.
- Ernest Preeg, Ph.D. of Manufacturing Alliance for Productivity and Innovation (MAPI) stated in a recent article that the $48 billion deficit in the first half of the year equates to a loss of 300,000 trade-related American manufacturing jobs, and the deficit is on track for a loss of 500,000 or more jobs for 2015.
And here are some recent facts about what’s happening in the transportation industry:
- Transportation stocks dive. As of September 15th, the Dow Jones Transportation Average is down 10.6% for the year compared to the S&P 500 during the same time period down 3.8%. So the DJT has dropped almost 3 times as much as the S&P 500.
- China Freight Rates Plunge. The China Containerized Freight Index (CCFI) tracks the rates for shipping containers to major ports around the world. The CCFI dropped 22% below what it was in February, and 18% below where it was in 1998 when the index was created.
- Don’t forget about truckers. The Cass Freight index tracks North American trucking volume. The number of freight shipments fell both in July and August by 1.2%. The August decline is viewed as a diversion from the normal pattern. Generally, retailers are stocking up for fall sales, so the August drop is a big red flag.
So what does all of this mean? I believe these indicators, for both the makers and takers of our economy, are an early warning signal for the rest of the economy. It’s the “canary in the coal mine” telling us that the economy is slowing down.
If true, now’s the time to take steps that will help you weather the next recession. What are those steps? If you’re an owner of commercial real estate, now is the time to lock in low interest rates for as long as possible. Take advantage of all the aggressive lending terms available except for one: don’t over leverage your properties. And maybe, just maybe, it’s time to start accumulating a rainy day fund when things go south.