Whether you are an economic pessimist or optimist, you have to consider all the data—not just the data you like. The problem is sussing out which data points to trust. Generally, measurements of actual activity are better than surveys about attitudes or behavior. What's more, many data series come out after the fact and are subject to revision, which makes them less reliable when it comes to gauging what's taking place right now. We won't have a definitive reading on how much the economy grew in this year's first quarter, for example, until much later this year.
But companies that handle a lot of transactions for their customers wind up with a lot of data. And if you're big enough and have national scale, that data can yield some significant insight. That's why a relatively new monthly employment number from ADP, which handles payroll, benefits and other administrative functions for hundreds of thousands of clients, is widely followed. Ceridian, which has a similar business, has a similar information-based data point that aims to provide a real-time snapshot of the performance of a key sector of the economy—and by proxy, of the entire economy. It's the Ceridian-UCLA Pulse of Commerce Index, or PCI.
Ceridian's ComData unit manages payment cards for trucking companies—drivers use them to fill up on diesel at giant truck stops. As a result, it has a pretty good idea of how much diesel is being purchased by professional truckers on any given day. Professor Ed Leamer of UCLA, who helped create the index, had a "Eureka!" moment when he looked at the points of purchase on the map overlaid on the Interstate Highway System. "I said, oh my god, we have sensors at 7,000 locations on all the interstates. What could be better than that?" (Economists get more excited than the rest of us when happening on a potential new indicator.)
Even in this day and age, a huge amount of stuff—commodities, components, finished products—is moved around the country by truck. "Trucking represents inventory and finished goods in motion," said Leamer. "In a normal economy, the trucking activity is proportional to GDP." If you lay the PCI over the Federal Reserve's Industrial Production Index, as you can do with a click on the Ceridian Index homepage, you see that the PCI seems to give us some advance warning of the direction and strength of industrial production. In effect, Leamer argues, the PCI allows us to know sooner than the Fed would tell us how industrial production is going.
But when an economy starts to run into trouble, the goods sector—not the service sector—tends to go south first. And so having a gauge on the performance of the industrial goods sector is highly useful. In late 2007, when few economists saw a recession on the horizon, the PCI began to stall out, and it fell significantly in the first half of 2008—a time when recession denial was at its peak. "It gave us a proper warning sign that the economy was going to sink," said Leamer. Then, the PCI began to turn up in July 2009, the month the recession seems finally to have come to an end.
The index is seasonally adjusted (since October is an abnormally high month due to stocking up in advance of Christmas) and adjusts as well for the number of weekdays in a particular month. (Fun fact: Diesel sales on weekends are half what they are on weekdays.)
Of course, like all economic indicators, the PCI has its weaknesses. Factors other than economic growth can affect fuel consumption. When energy prices skyrocketed, companies got religion about fuel efficiency. Wal-Mart instituted a plan to reduce fuel use in its trucking fleet. Hybrid-electric diesel rigs may soon hit the road. Companies like Greenroad have developed software programs that monitor behavior to encourage better efficiency. If truckers begin hypermiling, the volume of goods could easily rise without a concomitant increase in fuel consumption. And over time, as services grow and more goods become digital (nobody puts boxloads of CDs on trucks anymore), the relationship between trucking miles and GDP will grow more distant.
At this point, however, Leamer says these factors are marginal. So what is the PCI telling us now? The April report says the PCI fell 0.3 percent, although the measure was still 6.5 percent higher than it was in April 2009. Leamer, who believes (as I do) that the U.S. economy is now in a self-sustaining recovery, notes that the PCI, which was strong in December, has slowed down somewhat. As a result, we should expect a weak industrial production number for April. "This is cause for concern but doesn't completely dampen all the positive news we were reading about," Leamer said. As shown by the recent GDP figures, the economy keeps on truckin'—but in a slightly lower gear.
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