To The Moon

For the macro, we typically look at the economy’s GDP growth, inflation and unemployment.

Over time, I have included LEI and LMI as part of the consideration of the macroeconomy.

Leading Economic Index (LEI) (Source)

This is extracted from the recent LEI data on 18 April 2024.

The Leading Economic Index (LEI) provides an early indication of significant turning points in the business cycle and where the economy is heading in the near term. The Coincident Economic Index (CEI) provides an indication of the current state of the economy. Additional details are below.The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.3% in March 2024 to 102.4 (2016=100), after increasing by 0.2% in February. Over the six months between September 2023 and March 2024, the LEI contracted by 2.2% —a smaller decrease than the 3.4% decline over the previous six months.

LEI looks beyond data on GDP, inflation and unemployment rate. This deploys a range of data of financial (up 0.1% compared to the previous) and non-financial components (down 0.3% compared to the previous):

Financial components:

• Leading credit index

• S&P500 index of stock prices

• interest rate spread (10-year T-bonds less Fed Funds)

Non-Financial components:

• Average consumer expectations for business conditions

• ISM index of new orders

• Building permits, private housing

• Average weekly hours, MFG

• Manufacturers’ new orders, nondefense capital goods excluding aircraft

• Manufacturing new orders, consumer goods and materials

• Average weekly initial claims, unemployment insurance

This is a more comprehensive scope of factors compared to GDP, inflation and unemployment.

Suggestion for CBO’s LEI:

Services are contributing more revenue to the GDP. Should there be a component that measures services? The S&P500 has about 40% of its revenue from the international (non-USA) market. Thus, it does not represent the USA market alone. Looking at the S&P500 index alone may not represent the US market.

The other components that we can consider would be net new orders which include the orders that were lost. Building permits for private housing represent only the sector of real estate. There is a component of commercial real estate (CRE) that is omitted. The CRE is a potential pothole for the US economy. Is it possible to have the different sectors of the market represented in this LEI? This will ensure a more proportionate representation of the different sectors in the economy.

Logistics Manager’s Index (LMI) (Source)

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March 2024 Logistics Manager’s Index Report

LMI at 58.3Growth is INCREASING AT AN INCREASING RATE for: Inventory Levels, Inventory Costs, Warehousing Prices, and Transportation Utilization.Growth is INCREASING AT A DECREASING RATE for: Warehousing Utilization, Transportation Capacity, and Transportation PricesWarehousing Capacity is CONTRACTING

Since August 2023, we have seen a trend of growth in the LMI with the exception of November 2023. The average LMI for the last 3 months is 56.8, a strong sign of growth.

LMI looks into the following components:

• Inventory levels

• Inventory costs

• Warehousing capacity

• Warehousing utilization

• Warehousing prices

• Transportation capacity

• Transportation utilization, and

• Transportation prices

Inventory, warehousing and transportation are the key activities for the logistics sector.

This is the explanation of LMI by Freightwaves:

The LMI is obtained through a monthly survey of logistics managers in various industries in the economy. The LMI indexes are not seasonally adjusted and reported such that the index value represents the percentage of respondents that say that activity is expanding for their business. The LMI Composite Index is a combination eight unique other components that make up the logistics industry, including: inventory levels and costs, warehousing capacity, utilization, and prices, and transportation capacity, utilization, and prices. The LMI is calculated using a diffusion index, in which any reading above 50 percent indicates that logistics is expanding; a reading below 50 percent is indicative of a shrinking logistics industry.

Layoffs in Logistics

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From X user Craig Fuller:

Raven shuts over the road and dedicated trucking fleet. In the trucking bloodbath in 2019, the bankruptcies surged starting in Q2.

Seeing people lose their jobs is very unfortunate. But the trucking industry is built on the same economic principles that drive every capital system: supply and demand. We have too much supply. We need to eliminate the excess capacity, or the market will never reset. Bankruptcies are going to increase. This is a part of the bottoming process, as bad as it sucks for the carriers and their employees. We will see an acceleration in bankruptcies in the coming weeks and months. Long term, this is very positive.

Logistics and the economy

Logistics is the blood of the economy. For every value that is created, they come in the form of a product or a service. Everything requires logistics be it good or service. In the case of Services, the spending on logistics can be found in areas such as the procurement of materials, ingredients and the hardware required to deliver the various services.

A reduction in the supply chain implies a drop in consumption. While there is an increase in service consumption, there is a drop in the consumption of goods. We can correlate the health of the economy with the health of the supply chain industry. Supply chain volume can foretell the goods and services that would be consumed by the economy. The order needs to be placed, manufacturing to be completed and goods need to be delivered before reaching the warehouse or buyers.

We can use the reference of imports into the USA in early Q4 to forecast the sales from Thanksgiving weekend to Black Friday and Christmas. Though there has been more consumption of services over the years, goods are still a big part of American consumption.

LEI & LMI

When we look at the recent LEI and LMI, we are right to be feeling hopeful for the economy. The risk of recession is low as per March 2024 LEI data. We are also seeing strong growth in the logistics sector. Shouldn’t these imply that the economy is doing well?

These imply that the economy is improving. Debt is hidden behind the revenue. We are seeing increasing debts in the Federal government, corporate America and American consumers. With the higher interest rates, would this pose any risks?

As per my considerations, there are other data points that we can use as a reference for the economy. We are seeing banking failures. With the end of the BTF program, will there be more? Commercial real estate (CRE) is reporting losses of almost 90% in some commercial building sales and we are seeing record office vacancies averaging about 19%. The ripple effects to retailers, public services and other business owners are emptying some parts of business districts.

Is it possible for there to see strong LEI & LMI data with a growing economy? Yes. Is it possible for a growing economy to have weakening fundamentals (like debts)? Yes. Thus, these can co-exist.

Let us be cautious during this strong run and let us consider hedging.

@TigerStars

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