Tuesday, December 30, 2014

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.


  1. In an odd way I think you just gave us some good news. Looks like TSI is still pointing up.

  2. So far, nothing looks particularly gloomy when using the TSI although it certainly bears watching.

  3. Last quarter America's GDP was a strong 3.5% and has now been raised to 5%, but the fact that a 10% jump in federal spending, mostly on Pentagon hardware bolstered growth and was very much behind the numbers. This "pre-election" spending was the biggest increase in federal spending since 2009 when the Obama administration put in place a huge economic stimulus package.

    Mix in an upbeat November number concerning job creation, falling oil prices and ever higher stock market prices and new record highs and many people have the impression we are on a roll, but debt does matter. The truth is this market is over extended and distorted. The American and world economy is in uncharted water. The article below explores some of the many crosscurrents at work that could bring the economy to an abrupt halt.

  4. I wonder how much of the freight index is due to oil being shipped by rail from the shale oil fields. Clearly the increase in the production over the last 5 years has created a distortion or misrepresentation of the index when looking at the health of the overall economy.