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Thursday, September 15, 2005

[ALI] [Article] Waiting for shoe to drop

Waiting for the shoe to drop

By James Aaron Cooke, Executive Editor -- 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.

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