Monday, June 11, 2012

Monday Morning Economic Assessment

The US Industrial economy inched ahead last week (if pipeline scheduling is correct), as consumption slowed its descent.

The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) reversed course from the prior week, rising to 124.2 (from last weeks 124.0). In its raw dailies (above) the week started soft, strengthened midweek, then softened into the weekend..

The Consumption Index declined for its fifth week in a row, easing to 141.3 (from last weeks 143.3). In its dailies the measure was soft early but strengthened into the weekend.

The Inventories measure (the cumulative weekly difference between the Production Index and the Consumption Index), continued its long-term decline.

For the first time in months, however, internals are starting to appear supportive, suggesting the slowdown that started early in January may be over.

It's been a while since I posted on economics on the CWEI board (and the first-time for the BRY board - though others have regularly reposted in the past) so it's probably a good time to explain the basic assumptions of these "Economics Assessment" posts.

For some time I have followed natural gas pipeline flows (for investing in exploration & production companies), and as part of that process, broke down pipeline-posted natgas scheduling into a variety of supply and demand categories, including electrical generation, LNG imports, wellhead production, Canadian imports and Exports, and Industrial Usage to a great many industries across the US.

Those daily pipeline statistics for industrial usage, over the years, proved to track the economy quite nicely (judging by the monthly economic data releases) and seemed to peek and trough at the same time, and after several years I gained enough confidence in that correlation to begin to trust in the daily industrial data for my own investing purposes, and began to track and follow the natural gas scheduling into industrial facilities.

After realizing the value of the industrial natgas flow data, I modified most of my spreadsheets to break down the industrial flows by industry, and in that process noticed a correlation between cardboard (paperboard) manufacturing and consumer sales reports as well. Theorizing that cardboard packaging (being as it was a just-in-time shipping commodity) would be proportional to retail sales (most everything is shipped in cardboard in retail), that was modeled as well, as the consumption model.

The difference between those two models (industrial "Production Model" and retail "Consumption Model") then became the basis for a theoretical "Inventory Model", that is also included in these posts.

When the "Great Recession" started in 2008 (as pipeline scheduling first dived for paperboard (retail) then across the board in the industrial groups) after a time paperboard scheduling bottomed, and (suspecting an economic turn at that dismal time) I began the economics posts, and was able in 2009 to document the actual bottom as it happened near the end of the second quarter.

(Over the years in following these numbers I have formed an opinion of the basic causes of the economic cycles that have followed, and have been forced to change much of my thinking on the present "pop-economics" to bring my opinions in line with those of the gas flows, as well as present-day general economic, trade, and monetary statistics. Not to get too far off track here, I will save those thoughts for next weeks economics post. They really are off the beaten path!)

Back to todays modeling stats and observations...

Internally, food-group scheduling (historically counter-indicative of consumer-optimism) has broken well below prior years levels all the way through 2008 (the start of the recession), an indication of a fairly substantial gains in consumer optimism. Given the recent softness in the consumption index, I believe consumers are looking past the present gloom (perhaps to the November Elections) in expectation of change.

Steel-group scheduling (indicative of durable-goods), though still in the doldrums, is running ahead of May so far this month, the first monthly gain for steel since its January '12 peak. Steel's June turn is echoed across the metals groups.

The June strength is uncharacteristic for the metals, at a time when (going towards the traditional automotive retooling period in July) demand for metals generally trails off, and the automotive group (agreeing with the metals) is above prior years levels all the way back to 2008.

Also at multi-year highs are mining, refining and paper.

Housing continues to look sickly, with building materials, lumber, Masonry & brick, and cement groups all below prior-year levels for June. Masonry & brick and cement groups (new construction) are at multi-year lows (very tough year for homebuilders). Building Materials and Lumber groups are less soft looking (remodeling).