Not much wrong with the US economy

Profit margins in the US are contracting, with the second quarter showing a 6.0% decine in profit per unit of real gross value added (Nonfinancial). Contraction of greater than 10% would be cause for concern, but we need to dig a little deeper.

Declining US Profit Per Unit of Real Gross Value Added (Nonfinancial)

Earnings per share for the S&P 500 Index declined for the last two quarters and is projected to decline for the next two quarters as well (Q2 which is 98.6% complete and Q3 2015).

S&P 500 Earnings Per Share

The sharp fall in index earnings is primarily caused by losses in the Energy sector. Other sectors are reasonably healthy.

S&P 500 Energy Sector - Earnings Per Share

Another cause for concern is bellwether transport stock Fedex. Commencement of a primary down-trend normally warns that economic activity is contracting. Freight revenue for the fiscal fourth quarter increased by only 1%, while ground revenue increased by 19%. Slower earnings growth due to a lag in fuel surcharges and integration challenges with the acquisition of TNT may both be weighing on the stock.

Fedex

The Freight Transportation Services Index, however, has turned upwards.

Freight Transportation Services Index

And the LoDI Index continues to climb.

LoDI Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Spending on durables remains promising, with light motor vehicle sales rising.

Light Motor Vehicle Sales

And construction spending (adjusted for core CPI) climbing steeply.

Construction Spending

The ISM Manufacturing PMI Composite Index remains above 50, indicating expansion, but is softer than it has been for a while.

ISM Manufacturing: PMI Composite Index

The Leading Index from the Philadelphia Fed, however, at a healthy 1.57%, continues to project a healthy economic outlook.

Philadelphia Fed Leading Index

Despite the falling Fedex stock price and softer PMI, there does not appear to be much wrong with the US economy. The positives outweigh the negatives. Analysts’ optimism about an fourth quarter upturn may be a little premature, but does not appear far off-track.

Falling retail sales and freight activity: Cause for concern?

The rally in bellwether transport stock Fedex was short-lived and it is once again testing primary support at $164. Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend. Breach of support would confirm, suggesting a broad slow-down in US economic activity.

Fedex

The Freight Transportation Services Index reinforces this, declining since late 2014.

Freight Transportation Services Index

But the LoDI Index contradicts, continuing its climb.

LoDI Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Growth in retail trade (excluding Motor Vehicles, Gasoline and Spares) also declined for the last two quarters but remains above core CPI.

Retail Trade ex-Gasoline, Motor Vehicles and Spares

On a positive note, however, light motor vehicle sales are climbing.

Light Motor Vehicle Sales

New housing starts are edging upwards while building permits jumped sharply, indicating further increases.

Housing Starts and Building Permits

And overall construction spending is steadily rising.

Construction Spending

Solid rises in spending on durables suggests further employment growth. This makes me reasonably confident that retail sales and freight/transport activity will recover. All the same, it would pay to keep a weather eye on Fedex and the transport indices.

Falling retail sales and freight activity: Cause for concern?

The rally in bellwether transport stock Fedex was short-lived and it is once again testing primary support at $164. Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend. Breach of support would confirm, suggesting a broad slow-down in US economic activity.

Fedex

The Freight Transportation Services Index reinforces this, declining since late 2014.

Freight Transportation Services Index

But the LoDI Index contradicts, continuing its climb.

LoDI Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Growth in retail trade (excluding Motor Vehicles, Gasoline and Spares) also declined for the last two quarters but remains above core CPI.

Retail Trade ex-Gasoline, Motor Vehicles and Spares

On a positive note, however, light motor vehicle sales are climbing.

Light Motor Vehicle Sales

New building permits for private housing retreated in July but the trend remains upwards and new housing starts are increasing.

Housing Starts and Building Permits

Overall construction spending is also rising.

Construction Spending

Solid growth in spending on durables suggests further employment increases. This makes me reasonably confident that retail sales and freight/transport activity will recover. All the same, it would pay to keep a weather eye on Fedex and the transport indices.

[August 19th – This post was updated for Fedex and today’s release on Housing Permits and New Building Starts]