The Economic Box

***olddragon*** · Mar 2nd, 2009 9:45 AM

Ghost Town: The Future of the American Economy?

Why some important lead indicators you don’t usually see in the headlines mean bad news is ahead. By Robert Morley

If you want to get rich, don’t waste your time mining gold; instead, mine the gold miners. A related truism is this: You can tell how rich the goldfields are by how rich the local businesses are. Is boom-town America on its way to becoming a dusty ghost town? Judging from business reports, America is no longer the land of golden opportunities, and the economy is drying up.

How can you know ahead of time whether your bustling gold town is about to turn into an empty ghost town? Once upon a time, the Wall Street Journal used the term “barometric box” to describe the predictive nature of certain industries. It refers to how “causes” in one industry lead to “effects” in all others. Roy Harris of cfo Magazine describes how watching these “barometric box” companies reveals the current health of the economy. Unfortunately, barometric box indicators say America should prepare for lean times ahead.

Speaking of boxes, take the cardboard and packaging industry for example. According to Harris, the Wall Street Journal once wrote that by watching the production of cardboard boxes—more or fewer of them—one could tell how various packagers and shippers viewed the future of their businesses. Box orders indicated the demand for products that existed in the broader economy. If demand for packaging was increasing, the economy was growing. If the demand for packaging was slowing, the economy was possibly heading for a recession.

That is why the latest news from Smurfit-Stone Container Corp is so troubling. That barometric box-maker is going bankrupt! Smurfit-Stone is one of the largest packaging container makers in the country—and it filed for bankruptcy on January 26. Smurfit-Stone employs 27,000 people. Says Harris,

Of course, it’s always particularly distressing when the companies filing for bankruptcy are ones that we remember as the very picture of health from days still fresh in our memory. … But when the barometer breaks, how will we be able to predict the wider improvement that we hope is just around the corner? So let’s hope that other “barometric” companies manage to stay afloat, so we can measure the eventual recovery of our whole economy ….

Smurfit-Stone, however, isn’t an isolated case. It is not a one-company aberration; the whole industry is in trouble. International Paper lost $452 million last quarter, and lost 80 percent of its market value over the past year. Domtar is down 85 percent, AbitibiBowater is down 96 percent. The industry is reminiscent of another crumbling sector: America’s banks.

Today, the needles on almost all barometers, thermometers, box-ometers and any other kind of -ometer you can imagine are falling.

Planes, trains and automobiles, for example, all clearly indicate the direction the economy is headed.

Air cargo traffic is in “free fall,” according to Giovannie Bisignani, director general of the International Air Transport Association (iata).

“It’s gone from terrible to unprecedented,” says another iata spokesman.

Cargo traffic for U.S. airlines dropped 17 percent in December; 2008 was the worst year for U.S. air cargo carriers since 2001, the year of September 11 infamy. Air cargo volumes plummeted an even-more-drastic 29.5 percent in December from a year earlier.

Passenger traffic is also falling as people take fewer business and pleasure trips. Continental Airlines, United Airlines and U.S. Airways showed passenger totals down 4.5 percent, 7.7 percent and 5.3 percent respectively in 2008 as compared to 2007. Much of the deterioration came in the last half of the year.

America’s rail system, a network of arteries transporting vital goods and supplies to cities across the country, is suffering from severely low blood pressure. The Association of American Railroads reports that car loadings recorded their third straight record monthly decline. Layoffs may soon be announced. The largest railroads, including csx, Norfolk Southern, Burlington Northern Santa Fe, Kansas City Southern and Union Pacific are all reporting traffic declines in excess of 10 percent so far this year. Two are reporting traffic drop-offs of almost 20 percent.

The U.S. trucking industry is also in trouble. Big rigs are sitting idle for weeks at a time. I recently talked with a driver whose semi had a load for the first time in over three weeks, even with lower fuel prices.

America is seizing up.

But perhaps the best indicator of the health of the U.S. and global economy is the Baltic Dry Index. This index, which measures the cost to ship bulk commodities like ores and grains around the world, is telling us there is something very wrong with the economy. Back in December the index had fallen to less than 800, 93 percent from its peak in May of 11,793. What this means is that world trade literally seized up near the end of last year—despite the holiday shopping season. Global commerce came dangerously close to almost completely stopping.

Ships around the world sat idle. Demand for raw materials plummeted. Companies canceled orders. Mines couldn’t sell their stockpiles. Granaries sat filled.

No one wanted to ship goods. They weren’t sure if they were going to get paid for it. And many banks were unwilling to accept letters of credit from other banks due to fears of bankruptcy.

Today the index has bounced back slightly to around 2,100. The 11 thousands are nowhere in sight. It is reflected in America’s ports, which are eerily quiet compared to years past. Fewer goods are being sent to America, and the nation is exporting fewer goods too. And because fewer raw commodities are being brought into the nation, the Baltic Dry Index foreshadows a major manufacturing slowdown too. U.S. manufacturers are not importing raw material because they are not selling their current inventory.

The real behind-the-scenes evidence indicates America’s economy is grinding to a halt—so says the best economic thermometers and barometric boxes. Rich fields of gold would once have been an apt description of America’s wealth-generating economy. Unfortunately, this former nation of opportunity is almost all panned out. A future of lean times and hungry, work-filled nights lies ahead.

Americans should take this time to do everything feasible to get out of debt and ramp up savings. Life in America is quickly changing, and not for the better. •

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