Are Rising Fuel Prices Beginning to Affect Economic Growth?

Is diesel consumption beginning to fall because of high prices?  This question is front and center as the Ceridian-UCLA Pulse of Commerce Index™ (PCI) continues to become less good, and….

……fell 1.5% on a seasonally and workday adjusted basis in February, after falling 0.3% in January. The PCI in the first two months of 2011 has now given up all of December’s exceptional 1.8% gain.

Because of the very strong performance in December, however, the three month annualized moving average in the index was still up 5.4% over the previous three month period. Furthermore, February marked the 15th consecutive month of year-over-year growth in the index. Both of these data points suggest that the economic recovery is intact, but it remains tepid. Fifteen months of year-over-year growth has been enough to drive modest gains in employment, but we are clearly not yet seeing the signs of growth required to drive significant job growth or meaningful improvement in the unemployment rate.

The Ceridian-UCLA Pulse of Commerce Index™ (PCI) methodology is meant to correspond to Industrial Production (IP).  Econintersect, on the other hand, extracts the base data to forecast real economic growth for its own economic forecast – and not as a proxy for IP.  Diesel usage is a remarkable economic pulse point as freight in the USA almost exclusively is moved with diesel as its source of propulsion.

Using the unadjusted data, here is what is causing the concern of UCLA Anderson School of Management and Ceridian Corporation.  The year-over-year growth is continuing to degrade.

Econintersect is seeing this same trend manifest in rail transport (analysis here).  The reason is that February and March 2011 data were very strong.  We believe if we are currently in real (but weak to moderate) expansion – the YoY data should start improving in April.

HOWEVER, we do have another dynamic in play – rising oil prices.  Rapidly expanding oil prices are economy killers.  As evidenced by a graphic from Econintersect author Doug Short, fuel prices have risen higher then the price levels we entered the Great Recession.

Here is what the UCLA thinks:

February’s spike in fuel prices likely did not contribute to weakness in the PCI this month. However, if the trend persists, higher prices will likely have an impact in the coming months as consumers are robbed of spending power.  As a leading indicator for shipping and production, the PCI is very sensitive to this dynamic and should provide an early indication as higher fuel prices impact the broader economy.

However, deep in this month’s release – more context was provided:

Could the weak February PCI be due to greater fuel efficiency measures taken in response to higher fuel costs?  We don’t see much direct evidence for that case. The figure below illustrates the price per gallon of diesel fuel and the gallons per transaction. There has been a significant increase in diesel costs from $2 per gallon in early 2009 to $3.50 in February of 2010. That increase may be initially absorbed by the trucking companies through lower profits, but eventually those companies need to either pass that cost on to their customers or improve efficiency (with speed governors or some other means). The PCI data set doesn’t contain mileage traveled and doesn’t allow a direct measure of fuel efficiency, but we are able to make observations and gain insight based on indirect measures. Logically, if routes are fixed and the locations of refueling stops fixed, gallons per transaction would go down with improved fuel efficiency. The strong downward trend over many years in gallons per transaction is likely a result of increased fuel efficiency, smaller fuel tanks, and shorter routes. However, the short term “wiggles” around that trend are very little associated with short term moves in fuel price. Bottom line: The decline in the volume of diesel used in February might be due in part to an efficiency response, but there is no direct evidence to support this as a main driver of decline in PCI for the month.

Econintersect believes there is enough evidence to begin to worry about the rising oil prices are effecting our economy.  The Ceridian-UCLA folks do not think it effected the February results.  It can take months to feel the effects of slowly rising oil prices.

It is possible, the damage is already done – and we do not realize it yet.  Hopefully this thought is too pessimistic.

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