Written by Steven Hansen
The February 2011 Ceridian-UCLA Pulse of Commerce Index™ (PCI) rose 0.7% (down 0.1% year-over-year). Econintersect uses the PCI raw data to help forecast Main Street economy – and our analysis is that the index is up 4.2% month-over-month and up 4.1% year-over-year.
The PCI has been in a long term “less good” trend – but the unadjusted data Econintersect uses broke this downward trend.
In any event, use of the PCI as GDP or Industrial Production predictive index is 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 different conclusions
According to the economists at the UCLA Anderson School of Economics:
Even with the February increase, the PCI signals that the economy is much weaker than suggested by many other indicators. Specifically, the PCI suggests that the first quarter is shaping up very poorly. This quarter’s growth compares January, February and March of this year with October, November and December of last year. The January 2012 PCI is 1.8 percent below October 2011 and the February 2012 PCI is 1.3 percent below November 2011. With those negatives already known, we will need the PCI to grow by over 4 percent from February to March just to allow the PCI to grow positively in the first quarter of 2012 compared with the last quarter of 2011. That has happened only once in the 157 months since January 1999, the month that the PCI data dates back to. In other words, the PCI indicates a very weak or even negative GDP growth rate in the first quarter of 2012. That’s not a forecast. That is a word of caution regarding our currently exuberant state.
The divergence between the PCI and many other indicators is a puzzle addressed but not solved in last month’s report. Here we provide another clue. The PCI is 5 percent below its previous peak, while the GDP is above its previous peak. Indeed all of the components of GDP but one are above their previous peaks. Durable goods, nondurable goods, and services are all above their previous peaks. Most notable is the extreme swing in durable goods, at its trough 18 percent below its 2007 peak and now 7 percent above. That’s a recession — postponement of durable good purchases and making do with what we have. The other postponable component of GDP is the one that is still far below its previous peak— structures. Structures (think home building) fell more than 35 percent from its peak in 2006Q1 and has had no clear bottom. That is where the recession started and that is where the recession remains. There is a lot of trucking in this component of GDP. It has been said that it takes 17 truckloads to build a home. The continuing weakness of the PCI perhaps is signaling that the recovery in home building has not yet taken hold. The recent improvement in building permits and housing starts may get building going again and trucking as well. If we get the saws and hammers going again, we will have a real recovery with much healthier job growth.
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.
Now compare the above unadjusted graphic to this to the seasonally adjusted data from Ceridian-UCLA.
No wonder Ceridian-UCLA is so negative on the economy. Their seasonally adjusted three month rolling average remains in a downtrend. Econintersect’s three month rolling average of the year-over-year change has reversed trend and is now positive year-over-year.
But Econintersect sees a good correlation to transport indicators. As the Ceridan-UCLA is really based on road diesel, a 4.1% growth year-over-year in February compares favorably to trucking growth of 3.6% growth in January of truck transport:
- Pulse of Commerce Index (unadjusted) – diesel consumption (February 2012): up 4.1% year-over-year.
- Truck Transport (January 2012): Up 3.6% year-over-year
- Rail (February 2012): Up 0.8% year-over-year
- Container Counts (January 2011): exports decreased 0.7%, while imports increased 0.7% year-over-year.
Ceridan-UCLA continues to struggle with why their index is not in phase with the indicators they expect their index to track (e.g. GDP, Industrial Production, retail sales):
…… But since the summer of 2010 the PCI has been stumbling forward while GDP has continued to grow, although at a low rate. This same divergence is evident in the charts of real retail sales and industrial production that follow. This is a continuing puzzle which was addressed in the report from last month — addressed but not solved.
Although there is no question that the Ceridan-UCLA index as constructed is broken – this remains one of the more interesting indexes, with several interpretations. Based on all the leading predictive indicators, this index should have turned up in the 4Q2011 – and it did not.
Diesel usage should be an excellent economic pulse point, but in practice is not correlating to the indicators it was targeted to track.
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. Ceridan-UCLA dispute there is any evidence that rail is making inroads into road transport – but did not use a tonnage comparison.
Shifting to Rail? The Regional Data Doesn’t Say So. The railroads are reporting a significant increase in intra-modal activity with containers shipped first by rail for long-hauls and then transferred to truck for the shorter routes. If this shift to rail were a substantial part of the story in 2011, it ought to be evident in the regional data, perhaps in the Mountain region which was crossed by longhaul truckers and now by trains, or in the Pacific where rail might be displacing trucks for cargo destined for the East Coast. The chart below illustrates growth of the U.S. PCI since December 2010 until January 2012. The U.S. PCI three-month moving average peaked in May 2011 and has been on the decline ever since. The regions are sorted according to where they end up at the right, from the West South Central and to West North Central. The regions that seem to have contributed to the shape of the U.S. overall have wide lines and the others have thin lines. The Mountain region has a shape that amplifies the ups and down of the U.S. overall which might the effect of railroads. But the Pacific region was actually improving in the second part of 2011, not what might have been predicted by the shift-to-rail hypothesis. There are also evident shifts around March in the behavior of several other regions too: WSC, MAT and WNC. Thus, there is no clear evidence of the shift to rail in the regional data. It could be critical, but there is no smoking gun in the regional data.
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).