The latest IMF Country Report for U.S.A released yesterday says that the financial strains are still high and the recovery is likely be gradual.

Some of the key takeaways from this report are listed below:

• Exports of goods and services would be restrained due to the sluggish growth in countries with which the U.S. trades
• Near-term outlook is highly uncertain due to the continued deleveraging process of households with credit tightening and soaring unemployment
• Fall in commercial  real state is likely to continue
• Economic forecasts projected by the U.S. government are still more optimistic
• U.S. households savings rate is expected to rise providing funds for investment
• The U.S. dollar is moderately over-valued
• Concerned about the high level of underwater mortgages
• The balance sheet of the Fed currently standing at 15% of the GDP, could double to 30% of GDP if all available facilities are deployed
• The U.S. government will need to slowly phase out its interventions in the markets
• The crisis revealed major weakness in the supervision and regulation of the financial sector
• Rising pension liabilities and health-care expenditures would widen fiscal imbalances
• Household consumption is likely to remain weak due to high debt to disposable income ratio
• The U.S. consumer is unlikely to be the global “buyer of last resort” and hence U.S. may not be the engine of global growth in the future

The last point is particularly important. Moving forward, the world cannot depend on the U.S. consumer since they are tapped out and will not consume stuff like they used to before. Programs to stimulate demand such as the “Cash-for-Clunkers” are great in the short-term but they are unlikely to provide long-term consistent growth. The winding down of the American consumer has major implications for export dependent countries.  China especially will have to look elsewhere to export their goods and already due to lack of overseas demand thousands of factories have been shutdown there.  This brings us to some critical questions. If U.S. consumers will not be the driver of global growth in the future who will replace them?. Which country would likely take the place of the U.S. and import the majority of goods made by China? Can the emerging markets continue to grow without depending on the U.S. economy?

In an article titled Barometer on China’s Health: Shippers  the Wall Street Journal noted yesterday that “If China’s economy is faltering, the global shipping industry will be among the first to reveal it.”  Most of the commodities such as oil, iron ore, wheat, etc.  are shipped worldwide are transported by ships.

The article added “The Baltic Dry has surged fivefold since then amid signs of a recovering global economy, though it is essentially unchanged since late May. Particularly helpful to shippers has been the voracious appetite of China, which imported roughly 297 million tons of iron ore in the first half of the year.”

In addition to the shipping companies, other industries such as the courier, air cargo, rail freight, trucking, etc.  that are also involved shipping goods can also be used as indicators to measure an economy’s health. In this post, lets take a review some of the news related to these sectors in various part of the world to measure the health of the global economy.

1) Air Freight:

On July 30th, The International Air Transport Association (IATA)  reported “Cargo demand remained weak at 16.5% below June 2008 levels. This is a moderate improvement, albeit from extremely weak levels, over May, which was 17.4% below 2008 levels. There has been some improvement in world trade and, after adjusting for seasonal fluctuations, freight volumes rose 6% from the low point recorded in December 2008. However, the utilization of air freight capacity on international routes remained very weak (47.3%) in June due to unbalanced trade flows with Asia and some market share loss to ocean transport.”

Lower rates fail to lift Australian volumes 

“Amidst a global economic slump, air freight volumes in Australia have plunged despite a significant reduction in freight rates, the Australian Financial Review reported. “We’ve gone through downturns but nothing like this,” said Eric Matzen, owner and founder of Matzen Cargo. The Bureau of Infrastructure Transport and Regional Economics revealed that inbound volumes have taken a nosedive of nearly 22 percent.”

Lufthansa prepared for rest of the year 

“Deutsche Lufthansa gave a gloomy outlook for the rest of 2009 but said it saw itself prepared to fly out of the crisis in good shape, Reuters reported. Lufthansa said it expects the rest of the year to remain difficult as demand for air travel fails to pick up and volatile oil prices boost fuel costs.”

2) Railroads:

Canadian Pacific (CP): “The recession continues to have a significant impact on our business and although freight volumes appear to have stabilized, we have not yet seen a sustained recovery in traffic,” Fred Green, president and CEO, said in a statement when the second quarter earnings were released. Though traffic volume fell, CP’s net income rose to $157M due to the sale of its interest in Detroit River Tunnel Partnership.

Canadian National (CNI): “I think we have seen the bottom,” said CN President and Chief Executive Hunter Harrison.

“I am pretty optimistic that the second half will show a better performance than in the first half,” he said on a conference call with analysts.

Norfolk Southern (NSC):  “Railroad operator Norfolk Southern Corp. said Tuesday its second-quarter earnings sank 45 percent, as widespread cost cuts weren’t able to balance the steep downturn in shipping demand.”

“The Norfolk, Va.-based company says total traffic on its lines fell by 26 percent in the April to June period. Its biggest shipping category, which is the most closely tied to consumer spending, fell off drastically. General merchandise shipment sales sank 33 percent. Coal shipments fell 34 percent, as demand for the commodity in both steel production and electricity generation slid. Norfolk Southern’s remaining shipments — the ones transferred between trucks and trains — slipped 31 percent.”

Burlington Northern (BNI): “We normally see a lot of improvement in the third quarter — we’re just not seeing that. But we are seeing stability in the volumes,” CEO Matt Rose said in a conference call with analysts.” “Total traffic fell 18 percent, led by declines in automotive, industrial and consumer products shipments.”

3) Trucking:

YRC Worldwide (YRC): “US trucking company YRC Worldwide reported a large loss due to plunging revenue and hefty charges, and said it was hard to say if the economy has hit bottom, sending its stock down 14 percent, Reuters reported.

“We have seen some stabilization but we are not planning on an economic recovery in 2009 or anything in 2010,” chief executive Bill Zollars said “It would be nice if it happens, but we’re not planning on it.”

4) Courier Companies:

United Parcel Service Inc (UPS):
“United Parcel Service Inc (NYSE:UPS – News), the world’s largest package delivery company, reported an in-line quarterly profit on Thursday and gave a weak outlook for the current quarter, but said its domestic and global businesses appeared to be stabilizing. ”

“In a statement UPS Chief Financial Officer Kurt Kuehn said the economic environment remained “difficult.”

“Declines in both our domestic and international businesses appear to be stabilizing but volumes will remain significantly below last year’s levels,” he said. “Although declines in economic indicators are less dramatic than earlier in the year, questions remain as to when business activity will begin to strengthen.”

FedEx(FDX):

“The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” executive vice president and chief financial officer Alan B. Graf Jr. said. (All emphasis added)

From the above snapshots, it is clear that most shipping companies are not seeing a rise in demand. Majority of them are projecting tough quarters ahead. So any recovery in the global economy is still some quarters away.

Finally in Shipping in the downturn – Sea of troubles, the Economist magazine says:

“FROM the sheltered waters of Subic Bay in the Philippines to Falmouth on the south coast of England, a vast, swelling armada lies idle. In Asia’s deep-sea havens 750 vessels—container ships, bulk carriers, tankers, car carriers and others—are laid up. A further 280 are sheltering in European waters. According to Lloyd’s Marine Intelligence Unit, nearly 10% of the world’s merchant ships are swaying gently at anchor because of a collapse in global trade.”

The above paragraph makes it clear that hundreds of ships are sitting idle worldwide. Another proof that the global economy is not in the recovery phase yet.