Dow Transportation Average Index on top, S&P 500 index on the bottom
Image courtesy of StockCharts.com

In my last post I gave several reasons why you should be economically pessimistic and ignore the siren song of optimism sung by so many nowadays. As luck would have it, I have discovered yet another, thanks to Mark Hulbert in the post Are Dow Transports a dark signal for the Economy?  Above you can see a plot of the Dow Transportation average index on top of a plot of the S & P 500 index. By inspection you can see the Dow transportations are 13% off their all time highs in late 2014, while the S & P 500 has recently reached its all time high.     

The Importance of the Dow Jones Transportation Average

In any healthy, growing economy, goods will need to be transported across the continent from where they are produced to where people want to buy them. This is true even in an economy like ours that is mostly a service economy, with most goods produced overseas. Those goods still have to be picked up at ports of entry and transported to markets where they will be sold. Therefore, any time American transportation companies — the trucking, air transport, and railway companies — begin to suffer and retrench, you know that the economy is about to suffer serious trouble.

The health of transportation companies is important for three major reasons:

1. They are major economic activities in their own right.
2. The transportation they supply is a major cost, more or less, to every other good and service offered for sale.
3. Because of their importance to transport goods to where they are needed, they are a leading indicator of economic activity. When other sectors of the economy begin to decline, the transportation companies’ services are not needed as much, causing a decline in their profits.

The List of Major Reasons for Economic Pessimism

So let us now count the number of reasons we should doubt the sunny, happy judgement of those who would tell us everything is hunky-dory with the economy.

1. A two year trend of falling GDP growth.
2. Falling M2 velocity of money.
3. Very low recent corporate investment, with companies using their profits and money borrowed at very low interest rates to buy back their own stock.
4. A two-and-a-half year trend downwards for the Federal Reserve’s Labor Market Conditions Index.
5. A continuing U.S. corporate earnings recession.
6. A steady stream of U.S. corporations out of the United States to establish themselves as foreign corporations.
7. The fact that as many or more companies are dying as are being born.
8. The rising tide of not only the U.S. national debt, but state government debt as well.
9. Growing stagnation of the international economy.
10. Bearish leading economic indicators, such as the St. Louis Federal Reserve District Bank’s Leading index, manufacturers’ new orders for non defense capital goods, durable goods orders, new building permits, and the change in the national debt to GDP ratio, and now the Dow Jones Transportation Average Index as well.

Any one of these reasons for pessimism would be a matter of concern, but all ten of them should generate short-term panic.

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