Warren Buffett’s Indicators for the Economy

Warren Buffett once said that if he was trapped on a deserted island and needed to check on the economy, but could only get access to one set of numbers, he would look to railway traffic and truck tonnage— even though he’d want to check out a lot of figures.

While sometimes truck tonnage gets overlooked in favor of a focus on rail car traffic, both seem to be a pretty strong indicators— but only when the time is right. In 2015, Bank of America’s Ethan Harris and Alex Lin put railway traffic to the test against five other contenders: electricity output, steel output, lumber, chain store sales, and weekly jobless claims.

Warren Buffet’s advice was eerily spot on yet again, and it turns out rail car traffic was most closely correlated with changes in gross domestic product (GDP). Even if it is the most correlated, though, railway traffic accounts for only about 30% of variance in the GDP. This year, railway traffic has been down quite a bit— 7.8 percent— which might be concerning for some people using this indicator for the economy.

But don’t forget that Buffett’s second indicator he would need on that deserted island, truck tonnage, which is up 5.5 percent this year. When oil prices move downward, trucking tends to increase, which isn’t super shocking. It gets to a point where it’s less expensive, even though trucks use more fuel than trains.

An analysis report composed by Bespoke Investment Group actually touches on the subject, and says that it is important to look at a few different measures of freight activity in order to get a more accurate reading of the U.S. economy— which, let’s cut Buffett some slack, he was supposed to be on a deserted island.

The analysis is actually concluded with a bit of simple advice, Warren Buffett style: “Keep this in mind when using either index as a stand-alone measure of economic activity! Neither is painting a clear picture.”

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