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Let’s Talk Dirty: Is the ‘Garbage Indicator’ Flashing?

Garbage is dirty, stinky and once it's out of sight — for most of us — it's out of mind. But the truth is, garbage is a good indicator of the economy and right now, some say it's flashing a warning signal.

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It's the circle of life for the economy. Just about everything that gets made, from a half-eaten McDonald’s hamburger to the cover for your Apple iPhone, eventually finds its way to the trash bin. That smelly heap right there is your gross domestic product. (Read more: How GDP is calculated .)

“Our waste generation per capita is highly correlated with GDP; in other words, more trash equals greater economic growth,” ConvergEx market strategists said in an aptly titled research note called “Talk Dirty to Me.” “So while most of us think of our garbage is just that — worthless — in a different light, it’s a useful (and underappreciated) indicator of the state of the U.S. consumer, business cycle, and the economy as a whole.”

Recent data from the American Association of Railroads raised a red flag about a potential sharp drop in GDP. A chart of “waste carloads” vs. GDP flagged by American Public Mediashowed a direct and surprising correlation. Peaks and troughs in waste carloads were followed shortly after, or exactly at the same time, as near mirror-image moves in GDP.

For example, a peak in waste carloads in the the late 90s was followed shortly thereafter in GDP, and the sharp drop during the financial crisis in late 2008 to 2009 was reflected in both waste carloads and GDP. (Read more: Odds of Global Recession Are 100%: Marc Faber )

What’s got everyone buzzing is that right now, waste carloads for the third quarter are tracking for the biggest decline since the financial crisis. That raises speculation that GDP may be in for a big drop, as the impact of the European debt crisis and a slowdown in China hits the U.S. economy.

But ConvergEx warns that nobody should hit the panic button with both hands just yet. They point to several reasons why this time around, a drop in waste may not be an accurate indicator of economic activity.

First, there’s the fact that we’re recycling more — everything from newspapers and bottles to car batteries and computers. In 2010, more than 34 percent of all waste generate was eventually recycled – more than double the rate of the 1990s.

Even gold gets recycled in way, ConvergEx notes — and you’d expect that gauge to go up as more cash-strapped consumers turn their unwanted gold in for cash. Yet according to the World Gold Council, the supply of recycled gold fell 3.1 percent in 2011 from a year earlier and is on track for another decline in 2012. (Read more: Republicans Eye Return to Gold Standard )

Second, more trash is an indicator of a booming economy as businesses, manufacturers and households use more of it. In that context, no one holds any illusions that the recovery has taken hold just yet.

Perhaps most importantly, shipping municipal solid waste (everything businesses, government offices and private residences throw away) by rail isn’t that common — only New York City and Seattle do it that way, ConvergEx notes. Rail-transported waste tends to be from manufacturers, so this gauge would be more indicative of that sector’s health than the broader economy.

Another key factor is housing. Home construction and renovation are a huge driver of bulk waste — and the dropoff in construction in recent years would obviously be reflected in the rail numbers (Though it's now starting to pick up). Then there's the shift in housing trends: there are delays in new household formation and “four people sharing a house generate less garbage than the same four people living alone,” ConvergEx notes.

And recent growth in multifamily dwellings also put a ding in the trash generation — apartment dwellers don’t have yards or garages and typically generate much less waste — even if they are ordering takeout every night!

Also consider the fact that summer is when a lot of business activity slows down. A lot of people aren’t out buying as much because they’re out having fun, enjoying the weather, or on vacation. Plus, it’s a time when you eat a lot of fresh fruits and vegetables, which uses less packaging than lunch snacks or back-to-school supplies. September is when we all get back to business, running our trash-generating households and businesses at full throttle.

At the end of the day, ConvergEx notes, all that we’ve learned here from the falling trash levels is that the economy has slowed — and that’s not a news flash.

Likewise, “none of this means you should go throwing out all of your old T-shirts or printers or driver around for hours because you want to push up GDP!” ConvergEx advises.

And if you’re looking for signs of a recovery, the analysts note — keep an eye on the curb!

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