Storm warning

My mother and stepfather (Dewey's dad) run a marine canvas business, making boat covers, canvas boat tops and cushions for a mixture of private owners and manufacturers. Over the past 20+ years they have grown their enterprise from a 900-square-foot house and a one-car garage into a compound of homes, workshops, sheds and warehouses.

Working in a sector as cyclical and fragile as the pleasure-boating industry has turned them into sensitive business-cycle barometers. When they experience dramatic drop-offs in orders, national recessions follow within a few months. When their orders start to rise again, an economic recovery is coming -- even if Wall Street hasn't detected it.

Other sectors have some similar early warning capabilities (newspaper advertising being one of them), but in my experience marine canvas has never been wrong and it's always been first. This predictive power  is amazing, but not surprising -- not when you consider the nature of boat ownership and the kinds of boat owners who form the market for customized, high-quality marine canvas.

So when you're looking ahead to 2007, bear this in mind:

In the last couple of months, orders for new boat canvas have taken a nosedive.

There's a storm coming. Batten down the hatches.

Comments

[Jean McGreggor]

We are seeing a bit of it in my business as well. Some of the high end builders are slowing production. All of them are tightening up wherever they can. So are we.

[Anna Haynes]

What were their orders like after 9/11? after the 1987 stock market crash?
(Given our tendency toward selective recollections, am wondering if their predictive abilities are infallible or merely excellent.)

[DeweyS]

I forward this article to my friend who pays attention to the market/economy much more than I (the author of those missives on fuel prices). His response:

Could be. Job creation came in very low just on Friday. That sparked a stock rally so many on the Street think the Fed has raised rates as high as they dare. I'm not sure if a recession is coming but I think the economy may slow far more than the Fed anticipates. Just in the time for the November elections. Excellent.

[DeweyS]

I don't think our experience in 1987 is a good predictor.

In 1987 the business was a mixture of custom retail boat canvas and Original Equipment Manufacture (OEM -- what comes on the boat from the dealer). 1987 was also when a "Red Tide" hit the local area and damn near destroyed the local tourist market -- and that had a very strong negative impact on the custom business but less of one on OEM.

However, at the time the primary boat manufacturer for whom we supplied OEM canvas was relatively small with much more local distribution channels as well so it's difficult to determine the effect the market crash had on the business.

According to my Dad, 9/11 did not have a very strong negative impact on business. Traditionally, winter is a slow season for boat sales (go figure, eh?) so the experience might have been different had it been 3/11. Also, in 2001 his business still had a custom-work component.

My belief is that custom and OEM are well balanced -- when people decide not to buy a new boat the often get new canvas instead. At this point his business is over 95% OEM.

His actual economic prediction model is this:

He is a member of a trade association and regularly talks to various people in the same business up and down the eastern seaboard.
His business seems to have about a 1 year lag -- both positive and negative -- behind a large custom work manufacturer inside the D.C. beltway. For the past 6 months or so that business is reporting extremely low sales. Companies for which he OEMs are collaborating this in that new boat shipments rates are about 50% lower than this time last year.

He attributes this relationship between business indicators to the DC company being closer to the seat of government and therefore getting a preview of what's coming up in the country. He has also noticed a strong correlation between boat sales and consumer confidence, guestimated somewhere in the 70% range. As the boats for which he makes canvas sell around the $40k mark this makes a lot of sense.

[Daniel]

Dewey was really part of the business in a way I've never been.

For what it's worth, Janet heard a negative report about newspaper classified advertising recently -- but it's hard to place significance on that right now, thanks to Craig's List...

[Hue]

No one should use one indicator in a vacuum. But Daniel's parents' business is consistent with a lot of economic data pointing toward a recession or the dreaded stagflation, sluggish economic growth coupled with a high rate of inflation and unemployment.

Some people on Wall Street think we're headed toward a lot of pain, going from a stock market bubble to a real estate bubble, created by the Fed before and after the stock market bubble.

I've participated in both bubbles. I was in the Bay Area in the late 90s, and I'm in the mortgage business now. In 2001-2002, a lot of people were forced to move from depressed tech and investment companies into the mortgage business, booming due to low rates. ($2000 will buy a lot more house at 5.5% than at 8% -- partly why housing values went nuts in places in Calif., NY and Florida.) Today, there is no next train to jump on. The Fed is also a box because lowering rates will not help much (they will be pushing on the string) and inflation is a worry.

Inflated assets must deflate. No one can assess the exact damage of the housing bubble bursting. Can't be pretty.