As a reminder, last month the Ceridian-UCLA Pulse of Commerce Index™ (PCI) declined 1.0%. As diesel use is directly related to economic activity – this was a big deal.
The PCI, which is designed to mimic GDP based on diesel consumption, has improved 1.1% in October 2011. Econintersect uses the PCI raw data to help forecast Main Street economy – and our analysis is that the index is UP 1.5% month-over-month and UP 1.3% year-over-year.
The data has been in a long term “less good” trend which turned into an outright contraction in August 2011. September 2011 broke this trend with positive data – but one month of data is not a new trend. Therefore, this index’s trend analysis will have to wait for the coming months to see what develops.
Both the authors of Pulse of Commerce Index and Econintersect see diesel consumption as an important economic pulse point. Both use the data in different ways, apply different methodologies to analyze the data, and offer slightly different conclusions
According to the economists at the UCLA Anderson School of Economics:
The October data offers a welcome relief from the double-dip fears that were rampant a month ago, but one month does not mean a new trend. Until we get a series of positive months, it remains a she-loves-me, she-loves-me-not economy with bad news followed by good followed by bad.
Moreover, the positive month-on-month news in October is relative to a very disappointing September result. Though the growth in October offsets the September decline, it doesn’t offset the cumulative decline including August and July. The average of the last three months has declined compared with the previous three months at an annualized rate of 5.8 percent, and the PCI remains lower than it was during most of the first half of 2011.
Given the weak PCI, the advance estimate of third quarter GDP growth of 2.5 percent was surprising, but the final estimate may be lower. The PCI measures inventories in motion, and it is noteworthy that the inventory component of GDP contributed minus 1.1 percent to the overall 2.5 percent growth rate. In other words, if there had been no negative contribution of inventories, the growth rate would have been a healthy 3.6 percent. The positive growth of the PCI in October is the first sign that the inventory contribution to growth will turn positive, thus contributing to a favorable fourth quarter number.
Additional corroborating evidence of the weakness in inventories comes from the Ports of Long Beach and Los Angeles being down 3 percent in import volumes compared with a year earlier. In the third quarter, imports contributed only minus 0.3 percent from GDP growth, compared with minus 2.0 percent or more when the recovery seemed to be taking hold from 2009Q2 to 2010Q3.
Last month we wrote, “The positive point of view on this extremely disappointing news is that businesses, in the face of the considerable concerns about growth, are unwilling to restock for a potentially vibrant holiday season at the same time as normal and they are planning to ramp up inventories late this year, if and when the sales start to materialize.
In other words, what we are observing this month is only a weak forecast of future sales, a forecast that doesn’t have to be self-fulfilling. With lean inventories, increases in sales mean increases in production and in jobs.” The October data are consistent with this, but we will need a strong November and December for the December level to exceed last year’s December. Incidentally, the last two December’s have been unusually strong, hinting at a new holiday seasonal pattern, and promising better data in the months to come. However, the improvement in October was concentrated in the third week, and by the end of October, trucking activity adjusted for the season was as weak as it was at the end of September. This does not lay the foundation for a strong November.
In relation to the index author’s statement “the Ports of Long Beach and Los Angeles being down 3 percent in import volumes compared with a year earlier” – Econintersect covers this index (analysis here). However, rail traffic analysis offers a counterpoint because intermodal transport (containers and truck trailers on rail) are near all time highs (analysis here). The PCI diesel consumption is based on roadway sales – not railroads. The Achilles heel of this index might be its inability to adjust for alternative non-truck transport.
The transport network in the USA is almost exclusively fueled by diesel – and diesel consumption makes a good proxy for forward economic activity (as transport occurs, on average, one to two months before consumption). Caveat is that this index is based on road use of diesel.
The PCI is modeled using Ceridian’s diesel distribution network to forecast economic growth – primarily Industrial Production and GDP. Econintersect extracts the unadjusted (not modeled) diesel index for its economic model. Graphically, the unadjusted data has a slightly different feel.
What analysts look for are pivot points in the data. Backward revisions in the data also throw wrenches into the works – there was a huge backward adjustment in the July 2011 data. Unfortunately, the data is noisy as demonstrated by the following table of year-over-year growth rates in 2011:
Jul revised from 1.72% to -1.08%
The three month moving average of year-over-year diesel consumption change may have started to deviate from the downward trend. As the trend may now be slowing, Econintersect has no summary interpretation, awaiting data for the coming months.
Caveats on the Use of this Index
This is a post Great Recession index which has little real time history on foretelling economic activity. This model works in hindsight. A positive point for this index is that there is usually little backward revision.
Diesel consumption per ton mile is improving at rate which Econintersect has no means to quantifying in the U.S. But on a global basis, this improvement is likely well over 1% and could be as high as 5% per year such as:
- There have been significant inroads for fuel conservation by placing trailers on higher efficiency railroads;
- There has been some conversion of diesel trucks to using LPG;
- Not only has current environmental standards forced conversion to more efficient diesel technology – the rising price of diesel alone has forced truckers to upgrade to the higher efficiency trucks / engines / trailers/ use management;
- Tractor design continues towards more aerodynamic design.
Although it is true that diesel moves the goods necessary for the economy, using diesel data without an efficiency adjustment likely will provide incorrect conclusions. Therefore, it is trend lines, not specific values, which are important. It is very likely this index is UNDERSTATING the economy by an amount equal to the indeterminate efficiency improvement rate.
Monthly diesel use can vary with the weather or other natural causes making is index noisy. For this reason, Econintersect uses the three-month moving average for modeling economic activity.
The PCI diesel consumption is based on roadway diesel sales – not railroads, sea or air transport. The Achilles heel of this index might be its inability to adjust for alternative non-truck transport.