VALUE: After Hours (S07 E43): Leading Economic Indicators Can Mislead

During their recent episode, Taylor, Carlisle, and Todd Wenning discussed Why Trucking Cycles May Be Turning. Here’s an excerpt from the episode:

Tobias: Are you seeing any recovery outside of transport? Do you think it’s all trucking? Do you think it’s trucking specific?

Todd: Yeah, I have in the portfolio about 30% industrials right now. I’ve seen them start to pick up across the board, which has been good to see. I also own Ferguson, which is a plumbing and water infrastructure company. They’ve had some nice tailwinds behind a lot of the datacenter, a lot of large projects being done. So, all that bodes well, I think, for an upturn in the industrial economy here in the next couple of years, which would be really nice, because it’s been a pretty difficult place to be over the previous year to 18 months.

Tobias: Yeah. I tweeted this one out, too. I like to look at the leading economic indicators against the coincident economic indicators and those two series together. When the leading drops well below the coincident, then it’s suggesting that there’s some weakness. It’s interesting to just take that ratio of leading to coincident. It goes back 30 years or something like that.

Actually, it goes back further than that, because there are three readings that are as low as the current reading and the 1982 at the very bottom, 2009 at the very bottom, and today are all the same. It’s a little– [crosstalk]

Jake: What does that mean?

Tobias: Well, there’s a portion of the leading economic indicators that’s sentiment based. And so, it’s University of Michigan, some sentiment indicators are in there and they include– funnily enough, included leading indicators is the stock market, which is strong. So, why that is giving a negative reading is basically it’s all of this sentiment reading is very negative. I don’t know if that’s a political people generally upset politically, or if it’s an actual indication of how they’re feeling. It’s such a strange reading. It’s so far below anything else on that series that it looks to me where at the bottom of a recession rather than at the beginning of a recession. If anything, it looks like we’re coming out the other side.

And then, I see stuff like transports recovering, and there are a few other things that look like they’re recovering. It’s just a very strange cycle. I don’t know if that means it macros. Macro is totally unhelpful, I get that. I’m interested in it, because it has direct impact on some of the cyclicals that I hold. Folks at home, let me know. Because I’m interested in it. I haven’t really got my head around it completely, the sentiment portion of that leading economic indicator survey. Is that misleading or is that telling us that we’re at the bottom of an undisclosed recession, depression? Let me know. Guys, I want– [crosstalk]

Jake: Above my pay grade. [laughs]

Tobias: Yeah. Above mine, too. I’d love to figure it out. It’s one of those things I’ve been looking at that– I think it looks to me like it started in 2022, and there’s just been this straight line down since 2022 to today. It’s whacked all of the cyclicals. The only things that haven’t been caught in that are things that are beneficiaries of the AI CapEx spend. GDP is not caught in that, because GDP has a big government spending component to it that just means that it’s soaring well above all of those cyclical indicators. It’s not helpful at all, I realize, but interesting.

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