Stock market bulls got some unexpected good news on Thursday.
It wasn’t that the Nasdaq Composite Index (.IXIC) is at a record level.
It’s that the Freight Transportation Services Index hit a new high.
Freight Transportation Services? Few investors pay attention to the data-release schedule for this index, much less even know about it. But its status as a leading economic indicator rests on a strong statistical foundation.
The Freight Transportation Services Index measures the volume of the movement of freight by U.S. transportation companies. It is calculated by the Bureau of Transportation Statistics within the U.S. Department of Transportation. The index is updated monthly, and the most recent figure, reflecting data for May 2018, was released Thursday morning; the index registered its third new high in the past four months, and is up 6.4 percent% over the trailing 12 months.
Why does this matter? According to research conducted by the Bureau, downward trend changes in the Freight Transportation Services Index have, at least over the past three decades, led economic slowdowns by an average of four to five months. That may not seem like a long lead time, but keep in mind that it’s rare to find indexes that are reliable coincident indicators, much less leading ones.
The accompanying chart also plots a companion index that reflects passenger transportation in the U.S., as well as a combined index which reflects both the freight and passenger versions. Even though these other indices don’t boast quite as good a track record as a leading economic indicator as the freight version, their record is decent. And, as the chart shows, each of these other two measures is also at an all-time high.
It stands to reason that the freight transportation sector would be a leading indicator, of course. If the economy is about to grow more slowly, or turn down, expect freight companies to be among the first to exhibit weakness.
That the sector is not showing any early-warning signs of such weakness is particularly significant right now, given widespread worries about an imminent trade war with China and other major U.S. trading partners. The freight transportation sector can be considered a “canary in the coal mine” when it comes to the likelihood of such a trade war, and so far the canary seems to be doing just fine.
To be sure, the latest Freight Transportation Services Index reading doesn’t amount to a guarantee that the U.S. economy in general, or the stock market in particular, is on solid ground for the foreseeable future. Perhaps the best way to think about it is by asking a rhetorical question: If the economy and stock market are about to head over a cliff, why hasn’t this shown up among freight-transportation companies’ prospects?
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