2024 will be a crucial year for the U.S. economy, particularly around what the Fed will do with interest rates. But for the Fed to lower rates, they have to see signs of slowing growth.
What reliable signs are there that the economy is moving in either the recessionary or the growth direction? There has to be a better way to tell than using the Super Bowl Indicator (it doesn’t work, folks).
According to some seasoned investors, you may want to ditch the many tools for predicting economic outcomes in favor of just one: the so-called cardboard-box indicator, also known as the cardboard-box index. What is it, and is it really the most reliable way to tell which way the economy is headed?
What Is the Cardboard-Box Indicator?
Investors have used the cardboard-box indicator for years. The logic behind this metric is that the total number of corrugated fiber boxes ordered by manufacturers, the greater their planned output. Because up to 80% of perishable goods are still shipped in cardboard boxes, for many economic experts, it’s still a dependable way to predict where consumer spending—and, therefore, the economy as a whole—is headed.
Lately, the cardboard-box index has been making the headlines because Jeffrey Kleintop, managing director and chief global investment strategist at Charles Schwab, uses it to issue his predictions about the economy.
“Things that we make or ship tend to go in cardboard boxes,” Kleintop told MarketWatch. “I look at demand for corrugated fiberboard, which is what most cardboard boxes are made of. During the last three or four recessions over the last 30 years, demand for cardboard boxes fell by 10% to 15%.”
There’s definitely something to it because the last time cardboard-box revenues and shipments plummeted drastically, by 50%, we were in the throes of the 2008 recession. Last year, cardboard-box manufacturing declined by 10%, which, according to Kleintop, was a significant number that signaled that the U.S. economy was, in fact, in a recession despite nonmanufacturing stocks doing well.
This year, demand for corrugated fiber has already bounced back. Don’t be surprised if you notice nonmanufacturing stocks declining this year while manufacturing stocks increase. This is actually a sign of a healthy economy, according to Kleintop.
How Reliable Is the Cardboard-Box Index?
On its face, the cardboard-box index is not a bad way to gauge which way the economy is headed, especially given that respected finance experts endorse it. In fact, it is widely believed that the cardboard-box index was first endorsed by former Federal Reserve chair Alan Greenspan. It would seem that it doesn’t get any more reliable with a backing at that level.
And yet, there is one potential issue with the cardboard-box index, and it’s actually a pretty big one: The indicator doesn’t necessarily reflect the wider context of the U.S. economy. True Tamplin, a certified educator in personal finance and founder of Finance Strategists, told BiggerPockets that it’s important to consider one crucial fact of today’s economy: the ‘’shift in consumer spending from goods to services, which reflects 70% of GDP.’’
While the decline in cardboard box manufacturing at the end of 2022 ‘’was interpreted as a signal of eroding consumer demand following the pandemic, influenced by factors like dwindling savings, inflation, and fears of a recession??,’’ Tamplin says, he urges caution before aligning with these interpretations. He thinks that while the sale of cardboard boxes definitely tells us something about the economy, the decline in cardboard sales ‘‘doesn’t necessarily indicate an overall economic decline, but rather a shift in the nature of consumer spending??.’’
Back in 2018, The Atlantic called this a ‘‘paradigm shift’’ in the U.S. economy, no less. The argument was persuasive: A huge number of consumer goods now come with at least one functionality aspect that is service-based and typically digital.
Think of a smart TV, for example. Part of your consumer relationship with this product is using all the streaming services that come with it. These are provided and managed by digital service companies and staff. And these aren’t really optional add-ons anymore, either. These features are ‘‘critical to functionality,’’ as The Atlantic explains.
A Service Economy Indicator?
Maybe in a few years’ time, we’ll have a Netflix indicator based on how many people are canceling/renewing their subscriptions or a banking app indicator. Digital services are integral to today’s consumer spending. So, it may be well worth paying attention to how the service economy is doing as much as to trends in manufacturing.
The problem is that the service economy is difficult to track reliably. It’s just that much easier to track the number of cardboard boxes produced and shipped. A U.S. Department of Commerce Report admits that currently, ‘‘BLS productivity data are available only for a limited set of U.S. service industries, accounting for about 40% of all service sector employment.’’
This means we don’t really know how a huge chunk of the U.S. economic output is performing, hammering home the realization that tracking the economy on the basis of consumer behavior is currently a bit of a fool’s errand—or at least it won’t get you very far on its own.
This doesn’t mean that the cardboard-box index has no value. But if you’re basing your real estate investment decisions on it, you may need to do a bit more homework.
BiggerPockets spoke to Adam Koprucki, founder and CEO of Real World Investor. As a bare minimum, he recommends using the cardboard-box index ‘‘in conjunction with other leading indicators, like new housing starts, money supply, and the shape of the yield curve.’’
We’d add the BEA Digital Economy Tracker to that. It doesn’t encompass all of the service economy, but it’s a pretty interesting tool for measuring what is, by now, an integral part of the country’s economic output.
Spoiler alert: The numbers are looking pretty good. In the 2018-2022 period, the growth of the digital economy outpaced the real GDP growth of the overall U.S. economy, 6.3% versus 1.9%. Now, that is impressive—and the data may well hold some key insights into why the U.S. never entered a post-pandemic recession.
Cardboard-box production can be tracked at the Fibre Box Association website.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
