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Trains, Planes, And Growth


Economists, investors, and policymakers are always looking for better ways to gauge current and future economic activity. Now the government is offering a brand-new tool.

On Mar. 10 the Transportation Dept. released the first report of its Transportation Services Index (TSI), a monthly measure that follows freight and passenger movements. Made up of eight components ranging from trucking tonnage to mass-transit ridership to petroleum pipeline transport, the December reading rose 1%, to a high of 118.5.

That gain is a good sign for the economy, according to the index' creator, Kajal Lahiri, an economics professor at the State University of New York at Albany. He points out that the index is quite sensitive to shifts in economic growth because nearly all businesses rely on the transport sector. And its importance has increased in recent years, thanks to widespread use of just-in-time inventories and production schedules. That puts more pressure on the sector and makes its ups and downs more sensitive to demand.

Lahiri says the TSI is a good measure of "how the blood is flowing" through the economy. Indeed, analysis by BusinessWeek shows that yearly growth in the TSI and the Federal Reserve's market-moving industrial production index are highly correlated.

The index also foreshadows economic downturns, says Lahiri, because trucking and rail lines quickly reflect a drop in goods demand. Plus, passenger travel typically slows when business activity weakens. Using the professor's original data back to 1980, the index has signaled economic contractions a year before they occurred, on average. The index fell 2.5% in the year before the last recession, which began in March, 2001. In addition, the index provides another sorely needed measure of the service sector. Services constitute about two-thirds of the economy, yet few government reports cover them.

Since the index is still considered experimental, changes are likely. For example, Lahiri would like to add data for international and Great Lakes shipping to capture movement of imports and exports. But even in its current form, the TSI, scheduled for release in the first week of every month, should become a new crystal ball for economists and investors to peer into. Pharmaceutical companies have introduced a bevy of cancer-fighting drugs over the years. From 1971 to 1995 the number of such therapies rose nearly threefold, yet the age-adjusted mortality rate for people with malignant cancers barely budged. So have drugs failed in the war on cancer?

No, says a study by Frank R. Lichtenberg, a finance and economics professor at Columbia Business School. Using National Cancer Institute data for 2.1 million patients from 1975 to 2000, he found that cancer-fighting drugs improved survival rates. What has kept the mortality rate steady is that, as Americans live longer, the odds of developing the disease over a lifetime increases.

After factoring in a person's age and the use of other treatments, such as radiation and surgery, Lichtenberg calculates that cancer drugs accounted for 50% to 60% of the increase in survival rates. That comes out to an extra year for someone first diagnosed in 1995. What's more, five-year survival rates surged for those with cancers in certain sites, such as the prostate, where drug innovations have been the greatest.

The study shows that the annual cost for cancer drugs in '95 was $100 to $274 per patient. Applying Lichtenberg's methods to data for 2000, the cost was $166 to $460. Multiplied by the average life expectancy of a cancer patient, the total cost would be, at most, $5,000 -- a small price for an extra year of life. Americans don't save enough money. According to the Commerce Dept., households socked away only 1.8% of their income in January, compared with 7% in the early '90s.

But Daniel E. Laufenberg, chief U.S. economist at American Express Financial Advisors Inc. (AXP), says the reported savings rate misses a key factor: retiree benefits. Since the feds define income as earnings derived from current business activities, it counts money that private businesses put into their pension plans as income. It does not count retiree benefits, which include capital gains built up over time. The difference is huge: 2001 figures, the latest available, show benefits of $298 billion, vs. contributions of $75.9 billion.

The government measures savings indirectly, as income left over after spending. So while pension payouts don't count as income, they do show up when they are spent, which pushes down the official savings rate. Using payouts to measure income, the savings rate would be nearly three percentage points higher, says Laufenberg. That means as baby boomers retire and begin collecting benefits, the savings rate will be continually underestimated.


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