The Ceridian-UCLA Pulse of Commerce Index™ (PCI) rose 0.1 percent in November following the 1.1 percent increase in October. Econintersect uses the PCI raw data to help forecast Main Street economy – and our analysis is that the index is Down 0.4% month-over-month and UP 0.92% year-over-year.
The data has been in a long term “less good” trend – but the November data continues to confirm the downward trend in the data has been broken.
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:
With two months of PCI information now available for the fourth quarter, we are getting a not-too-rosy picture of fourth quarter GDP growth. Last month we wrote:
“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.”
The inventory contribution to third quarter GDP was indeed revised downward to minus 1.55 percent, which accounted for most of the revision of GDP growth to 2.0 percent. As far as inventories are concerned, as measured by the PCI, this quarter is not shaping up to be very good. With two months of data available, the PCI is looking for GDP growth in the range of 0.0 to 1.0 percent.
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. But as seen from the three month moving average, the longer term downward trend is broken, and the rate of growth has been stable over the last three 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.
Econintersect determines the month-over-month change by subtracting the current month’s year-over-year change from the previous month’s year-over-year change. This is the best of the bad options available to determine month-over-month trends – as the preferred methodology would be to use multi-year data (but the New Normal effects and the Great Recession distort historical data).