March Ceridian-UCLA Pulse of Commerce Index Update
(April 15, 2010)
Dear Subscribers and Readers,
“As California goes, so goes the nation.” Is there some truth to this old saying? California has certainly been at the forefront of many trends. However, could this really be true going forward? The budget problems in California are well publicized, but what is less publicized is the high cost of living in California, as well as the rising dichotomy between the most and the least wealthy over the last decade – a dichotomy that's greater than most areas of the United States, despite a generous welfare state. One could debate the root cause of this dichotomy for weeks, but what I would really like to discuss is the dysfunctional system that we call the Californian government. Not only does the structure of the system and its policies enhances market distortions (e.g. rent control policies, Prop 13, etc.) but the sheer size of the bureaucracy and its myriad of policies has also encouraged not just intense lobbying – but a whole population of folks that aim to find loopholes or “soft spots” in order to further their own cause (e.g. placement agents for CalPERS) without doing anything productive. This is simply a result of a bloated, inefficient bureaucracy whose workers get by with low wages (and who therefore are motivated to do side deals with real estate developers, etc.).
With an unprecedented amount of government spending and government intervention during the recent financial crisis, the U.S. government has taken on a significant burden of debt – a debt level that no doubt needs to be cut going forward. According to a recent Goldman study (using budgetary data for 24 OECD economies covering 35 years from 1975), there is only one effective way to reduce debt and sustain future economic growth, and that is, to impose budget expenditure cuts across the board (I love it when the empirical data backs up my logic). On the contrary, increasing taxes to compensate for a higher budget has proved very damaging for future economic growth (I would argue this is all the more applicable for the U.S. today given that we're starting from a very high base). The results are shown in the following chart (courtesy of Goldman Sachs):
Not surprisingly, cutting the budget deficit through cutting government expenditures has also resulted in higher equity prices, as shown in the following chart:
Note that, according to Goldman, the above data as used in the charts were cyclically adjusted – which means that if faster economic growth had somehow reduced the expenditure ratio, it is not reflected in the above charts. In other words, the above charts not only show a clear correlation – but also causation between lower expenditures (cause) and higher economic growth and stock prices (effect). Obviously, this has significant implications for investors. Going forward, not only will “Fed watching” remain a popular sport, but “fiscal spending watching” (which has not been in vogue since the Reagan years) will come back with a vengeance. My dual Master of Public Policy and MBA degrees may be quite useful, after all.
I now want to provide an update to the Ceridian-UCLA Pulse of Commerce Index. I first discussed this index in our March 28, 2010 commentary (“Building a Better Mousetrap”). To recap, predicting U.S. economic growth (not to mention economic growth of other countries) has always been a tricky endeavor, as timely and accurate leading indicator is usually difficult to obtain, and are typically subject to significant revisions. As a response to the lack of real-time and accurate data, the Forecast, in a partnership with Ceridian, has created an alternative index that has been more accurate as a leading indicator of the U.S. economy. Among other services, Ceridian provides credit and debit cards, including fuel cards and employer pay cards, and processes card transactions for various industries in the U.S., including the transportation industry (see the following link for the company's background). The underlying data of the Ceridian-UCLA Pulse of Commerce Index is derived from credit card swipes for the purchase of diesel fuel at over 7,000 truck stops all over the country. Per the Forecast, “The interstates that crisscross America are the arteries along which flow the products that are the lifeblood of the economy. If the goods do not move, the economy turns comatose. Rather than measuring the pulse at a couple of locations, like the wrist and the neck, Ceridian has, in effect, installed sensors at truck stops all over the United States that measure the flow through this arterial system…
“The Pulse of Commerce Index is based on real transactions, observed instantaneously, with rich geographic detail. By tracking the volume and location of fuel being purchased, the Pulse of Commerce Index closely monitors the over-the-road movement of produce, raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers. Working with economists at the UCLA Anderson School of Management and Charles River Associates, Ceridian releases the index monthly for the national overall and for the nine Census regions, but the geographic detail of the data offer vast opportunities for studying details of local economies.”
The PCI has its limitations. For example, if some retailers shift their transportation contracts from trucks to railways due to increased freeway congestion, then diesel purchases will decline, and will have an unjustified negative impact on the PCI. Similarly, an increase in the fuel efficiency of the general vehicle fleet will also have a detrimental impact on the accuracy of the PCI. That said, the PCI has three major attractive features: 1) the data collected is in real-time – in theory, the PCI can be updated on a daily basis, 2) the data is accurate in that it measures actual transactions, as opposed to survey data as collected by the BLS or other government organizations, and 3) the data is very granular. For example, the Federal Reserve's Census region data is quite spotty and thus, the PCI can add significant value in terms of being a leading indicator of economic growth in the nine individual Census regions. In fact, the various regional Federal Reserve banks have already engaged in discussions with Professor Ed Leamer in utilizing the PCI as part of their Beige Book reports (which are published 8 times a year).
As shown in the following graph, the PCI would have been instrumental in calling the last recession, as the index started turning down in late 2007. The launch of the Ceridian-UCLA Pulse of Commerce Index is one of the most exciting launches (in the world of U.S. leading economic indicators) since the launch of the ECRI Weekly Leading Index. We have and will continue to track this index going forward. The following chart contains the most updated reading. As suggested by the new PCI data, Ceridian and the UCLA Anderson Forecast assert that “the economic growth in the first quarter was stronger than the consensus GDP forecast of 2.9 percent. Based on the PCI alone, expected GDP growth for the first quarter of 2010 is 4 percent, putting the economic indicator at the high end of forecasts (fewer than 10 percent of forecasters see GDP growth at 4 percent or greater). The PCI also suggests Industrial Production will grow at a healthy 0.5 percent when the Federal Reserve releases that number on April 15.”
Henry To, CFA