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The Pulse of Commerce and The Chicken’s Dilemma

The Ceridian-UCLA Pulse of Commerce Index™ (PCI) is an interesting indicator that correlates well with the movements of the stock market. Comparing the PCI with the SPX can provide useful insights at times.

According to the Ceridian Index website, “The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers.” Click here to download the August report.

As with most economic data, the authors of the index present the data on a seasonally smoothed basis. In this case it makes some sense, but it still results in a fictitious number that may or may not be misleading, and can not reflect all of the nuances available in the actual, not seasonally manipulated data. That’s where we enter the picture.

This is the smoothed, seasonally massaged index as presented by Ceridian-UCLA.

Ceridian-UCLA Pulse of Commerce Index- Seasonally Adjusted Chart- Click to enlarge

On this basis we see a nice smooth curve with evidence of slowing in 2011. The economy would seem to be running out of fuel. Heh heh.

The press release today described the August action.

The Ceridian-UCLA Pulse of Commerce Index®(PCI), issued today by the UCLA Anderson School of Management and Ceridian Corporation fell 1.4 percent in August on a seasonally and workday adjusted basis, following a 0.2 percent decline in July.

“July and August results indicate that the PCI will decline in the third quarter suggesting GDP growth of 0.0 to 1.0 percent,” said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and director of the UCLA Anderson Forecast. “The August number supports the pattern of sluggish economic growth coming out of a recession, which is something that we’ve seen in the past. What we’re experiencing is the ‘new normal,’ where the U.S. economy will continue to stumble forward until a new growth engine is identified.”

I happen to agree with the good professor up to a point. Analyzing the daily real time Federal Wage Tax collections data led me to conclude that the economy had already entered recession at some point between June and August. Only the passage of a bit more time will reveal which view is more correct. In terms of investing and trading, it only matters to the extent that the weaker the economic data, the sooner and the more forcefully the Fed will act to goose the stock market. An economy that stumbles along in the manner described by Professor Leamer could actually be more bearish for the market since it will take the stumbling, bumbling Fed that much longer to inject enough cash to prop the market.  Doing the Twist, where the Fed simply exchanges its short term Treasuries for long term, won’t do a thing to increase overall liquidity.

With that in mind, does the actual PCI data give us any additional clues as to when the Fed might act?

Ceridian-UCLA Pulse of Commerce Index- Actual Not Seasonally Adjusted Index- Click to enlarge

Although the PCI as reported showed August to be a down month on a seasonally smoothed basis, in actuality it was up, with the index moving from 93.17 in July to 100.69 in August, a gain of 7.52. Some of that was due to calendar factors. There were 3 more business days in August than in July, and many trucks aren’t on the road on weekends and holidays.  Likewise August is usually the peak month seasonally.

Putting this year’s August gain in perspective, it was significantly larger than 2010’s 4.07 and 2009’s 1.73, and much larger than August of 2008, when the economy was in the middle of a crash and the August number was negative. The 2011 gain was slightly less than the gains from 2005 to 2007.  The August 2007 gain of 8.17 was just before the economy went off a cliff. The 2005 and 2006 gains of 8.55 and 9.72 reflected the abnormalities generated by the housing bubble.  All in all, this year’s August uptick of 7.52 appears to be not too hot and not too cold.

The problem is that this bounce did not break the weakening trend in the annual rate of change shown on the lower graph. The 3 month moving average of the annual rate of change now stands at just over 1%. When that average dropped below +2.5% in mid 2007, it coincided with the onset of a bear market in stocks and the beginning of the depression. The question now is whether  the moving average slipping below +2.5% in April of this year signaled the onset of another bear market and the reappearance of the depression.  While the annual rate of change hasn’t gone negative yet, it is still weakening. Yet, many conomists, most typically those employed by the Wall Street stock distribution machine, are simply proposing for no reason that it won’t get worse from here.

Normally the peak month, August was a good time for this index to break the downtrending momentum.  But August did not break the downtrend that began in mid 2010. Since this indicator is comparing apples to apples in season, the actual unadjusted annual rate of change is an accurate representation of economic momentum. On that basis the trend continues to be toward slowing, and it is not far from slipping into outright contraction.

August is the peak month in the overall index in most years. It was true in both 2009 and 2010. This year however, August was below the March peak. September is always a down month, so that lower peak in August will not be corrected in September. The issue in September will be how large the decline is. If it’s larger than last year, this indicator will edge closer to contracting on a year to year basis. If it is not as large as last year’s drop, the picture of an economy just muddling along will continue.

The conomic data, like the stock market, seems to be sitting right on the razor’s edge. It’s like the chicken-egg thing. The longer it takes for the data go go negative, the longer the Fed will sit on its hands. Without additional propping in the form of more direct Fed money printing, the stock market is likely to tip to the downside. The conomy will go with it, with or without the enactment of the increased spending under the proposed “we’re getting jobbed” legislation.

Our deadbeat nation Congress clearly will not vote to pay for the program by raising taxes. More likely, they’ll vote to cut taxes and not pay, just like they always do. That will increase the defecate, and the increase in Treasury borrowing will bring even more pressure on both the financial markets and the conomy. When it sees that big plop, the Fed will react. By then, the egg will be broken, and the chicken cooked.

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