On the economic forecasting front, there’s good news and there’s bad news.
On the positive side, Ceridian Corporation and the UCLA Anderson Forecast jointly announced the release of a first-of-its-kind indicator able to track the status, and potentially the future direction, of the U.S. and regional economies. Dubbed the Ceridian-UCLA Pulse of Commerce Index (PCI) by UCLA Anderson School of Management, the PCI is based on real-time diesel fuel purchases by over-the-road truckers using a Ceridian card at more than 7,000 locations across the United States.
The monthly index captures the real time monitoring of the movement of raw materials, goods-in-process and finished goods to retailers, factories and consumers across the country. Through Ceridian’s electronic card payment services for transportation industries, Ceridian is able to track and analyze the volume of fuel being used by truckers on a yearly, monthly, weekly and even daily basis. It is in short, a real-time data set that tracks fuel transactions around the United States, enabling economists to observe where and when goods are being transported around the country.
The PCI was developed by Ceridian in conjunction with economists at UCLA Anderson and Charles River Associates (CRA). According to Anderson’s Ed Leamer, director of the UCLA Anderson Forecast and Chauncey J. Medberry Chair in Management, in the fall of 2008 Ceridian approached CRA to review many of their databases, and he was invited to be part of the team. Since then, the economists looked at “a sequence of about six databases” – several of which will be released at a later date. “But we thought (the PCI) was the one that was really going to be a total home run and affect the conversation about the health of the economy in a way nothing else has in a long time," Leamer said.
The PCI series is similar to an existing, after-the-fact survey from the American Trucking Association called the Transportation Service Index (TSI). But Leamer says the TSI data are simply too noisy, subject to both revision and the lack of incentive for survey respondents to be accurate. In comparison, he noted, the PSI is based on actual transactions on a second-by-second basis all over the country.
“We call it the Pulse of Commerce because the arteries of the (economic) system are the interstates that criss-cross the country and the products on the trucks are the lifeblood of the system,” Leamer said. “Without the movement of goods the economy dies just like you’d die without the movement of blood in your arteries.”
A weak pulse
The creation of a significant new economic index represents a positive breakthrough for those attempting to analyze the economy – the downside is the dreary data found in the initial PCI release.
According to the January Ceridian-UCLA Pulse of Commerce Index, the U.S. economy fell at an annualized rate of 36.8 percent which comes in the wake of December’s significant increase in GDP. The more reliable three-month moving average for January showed a 3.3 percent gain at an annualized rate following the significant annualized rate of 14.6 percent the month before.
According to the initial PCI release, there is a long-term relationship between real GDP and PCI. The two series track similarly, though the PCI demonstrates more volatility during recessions. This is due to the fact that the truckable goods sector suffers more than the service sector during recessions, as consumers and businesses postpone their purchases of durable goods and equipment, but continue to rent housing, go to school and visit doctors.
“We had an extraordinary gross domestic product (GDP) in fourth quarter 2009 of 5.7 percent, but that came coupled with continuing weakness in the labor market,” Leamer said. “There was no significant improvement with regard to hiring, and there were very high levels of initial claims of unemployment."
“It’s a puzzling thing because you had extraordinary GDP growth without human beings, and growth is occurring without any improvement in the labor market. The story for 2010 is whether we’re going to get the labor market healed, whether we’re going to see firms hiring substantial numbers of people, and that requires continued GDP growth in the range of 5.7 to 6 percent. If we get 3 percent GDP growth, that’s just about enough to keep people who are currently employed employed, but not to employ those who have been laid off.”
A disappointing result
Leamer said that for hiring to take place during the recovery, GDP must be between 5 and 6 percent. The question posed by the release of January’s PCI is whether or not December’s GDP level will sustain. Leamer says the index yields a disappointing result.
“Many analysts believe that (December) was a one-time inventory phenomenon. Firms built up their inventories, and a full 3 percent of the GDP growth was due to an inventory build-up, which is technically completely correct,” Leamer said, echoing the PCI report that states such a build-up in inventories is unlikely to be repeated.
“The question is, having done an inventory build-up, will firms need to do some production and building based on sales? That’s the question that we’re looking forward to in 2010,” Leamer said. “There is evidence that production for sales is actually occurring, and there’s some hope that some components of spending —not just consumer spending but business spending on equipment and software — might be strong for the first couple of quarters and give us good GDP numbers.”
But, Leamer said, January’s drop in the PCI puts a damper on any optimism. “The economy has a weak pulse,” he said.
Going forward, the data set will be used to study the California economy, as well as in the case of the UCLA Anderson forecast. Forecast economists will study the activity around the Southern California ports, examining activity on the routes coming south from Oregon and Washington, to get a sense of the lumber coming into California. They will also look at the corridor between San Francisco and Los Angeles to get a picture of what’s happening with regard to trucking between the two cities.
“This is a data set that’s incredibly rich in terms of its geography. But there are other data bases (at Ceridian) too that we’ll be exploring and we’ll be bringing to the public at some point,” Leamer said.
“I think it’s important for the Forecast and for UCLA Anderson to demonstrate their connection with the business community and their willingness to improve our understanding of where the economy is and where it is going by developing new data bases,” Leamer said. “We’ll be the first to develop this as a forecasting tool, but we’ll only be one of many. This Index is going to be used by many people around the country once they become familiar with it, and I think our work here fits with the core mission of the Forecast and the school as a whole.”
To see monthly updates of the Ceridian-UCLA PCI index, go here.
A version of this story also appears on the Anderson School's website.