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Hidden Economic Activity


I really like this chart. It is supplied by a hedge fund manager I read, and it is pretty telling.

Rail traffic is booming which implies that the US economic recovery is stronger than the leading indicators show (many indicate a new recession looms ahead). Increased rail traffic indicates increased manufacturing. If manufacturing is increasing, it is due to orders for goods that need to be shipped via railroad. That implies that there is economic activity that isn’t being picked up by the government’s statistical data collection methodology.

It gives me some comfort that increased rail traffic indicates that we won’t see a double dip recession, but rather just a slowing to the 1.5% GDP Growth level I’ve written about here in past posts. In those posts, I noted that I thought we would see a slowing of economic activity as the Fed reduced the monetary stimulus from its quantitative easing program (ie, its a fancy way of saying the Fed printed money and injected it into the financial system by buying investments on the open market).

The 1.5% was derived from reducing normal 3% economic growth due to:

1. structurally high unemployment that keeps an above average number of consumers from spending at previous levels

2. increased taxes (States will have to increase taxes to cover deficits, look for a serious discussion of a VAT tax after elections, increased payroll taxes to pay for health care, increased income taxes on those making > $250K who also happen to be the people that hire employees, increased taxes on dividends and capital gains, increased corporate income tax rates, etc — don’t get me wrong, we will likely need higher taxes to pay down the national debt, but we need to reduce our spending at the same time)

3. interest rates will likely have to be higher over time as our national debt heads toward $20 trillion

4. increase government regulation that requires resources to be spent on compliance and not on production

5. the continuing residential real estate problems which some statistics show is getting better and some show is going to drag along the bottom for some time to come

So, I think we are in the process of slowing to that 1.5% level, which will at some point drive the stock market back toward the low end of our trading range. Right now, corporate earnings being better than expected are driving stock prices higher – look for the move to 1140 on the S&P 500 before we either move into a new trading range or move back toward the previous trading range (you can scroll back to earlier blog posts, fin the graph with the boxes, and click on it for a current version of the graph to see how we have broken out of the green box and are moving toward the pink box near 1140).

I’ll be back on the blog with more on that as we move through earnings season. Until then, I’ll keep you in the loop on the things I am watching that give me a feel for where things are headed.