Economy: These Below-the-Radar Indicators May Signal GrowthDavid Bogoslaw
U.S. economists and markets are almost hard-wired to respond in knee-jerk fashion to the latest numbers issuing forth from the U.S. Commerce Dept., the Bureau of Labor Statistics, and other government agencies, as well as established industry organizations such as the Institute for Supply Management. By recent measures, the U.S. economy isn't rebounding as quickly as some had hoped. But there's a wealth of lesser-known metrics that offer a more nuanced view of the economy—and in some cases, these hidden indicators reflect greater confidence that the recovery is on track and sustainable in the long run.
One of the more intriguing shadow metrics is the Pulse of Commerce Index, or PCI, a joint project of Ceridian Corp., a consumer services outfit, and the Anderson School of Management at the University of California at Los Angeles. The index climbed 3.1 percent in May from April, the largest monthly increase since February 1999. The PCI uses a very specific industrial measure to represent the overall strength of the broader U.S. economy: diesel fuel sales at roughly 7,000 truck stops across the country. If you think of the interstate highways crisscrossing the country as the arteries of the U.S. manufacturing economy, "the goods flowing in those arteries are the lifeblood of the system," says Ed Leamer, chief economist for the Ceridian-UCLA PCI. "This is the supply chain in operation."
And unlike lagging government data, the PCI reflects real-time info recorded instantaneously by sensors at each of those 7,000 truck stops. The pop in the May PCI calls for a big boost in industrial production, and given the historic relationship between the PCI and real growth in gross domestic product, the May PCI implies GDP will grow 3 percent to 5 percent in the second quarter, ahead of the normal 3 percent pace, according to the June 10 PCI report.
Real-time or not, the PCI is just as subject to uneven movements as any other economic indicator.
Leamer says the June PCI will almost certainly be below the May level since inventory restocking by manufacturers, which has had a major influence on PCI, can't continue to contribute to economic growth to the extent it has over the past three quarters.
Train shipments of waste and scrap materials have been increasing at the fastest pace in 16 years and have a higher correlation with economic growth than coal or copper, data compiled by Bloomberg News show.
Most economic measures tracked by investors—both mainstream and of the shadow variety—tend to focus more on the manufacturing sector, whose importance has been eclipsed by a growing, and now dominant, service economy over the past decades. The Institute for Supply Management's nonmanufacturing index is a notable exception. The component indexes within the NMI offer some telling clues about the broader economy. The data in the employment component of the survey "really do tell us where employment is going," says Richard DeKaser, president of Woodley Park Research in Washington, D.C., and chair of the National Association of Business Economics' Outlook Survey Committee. Nonmanufacturing employment has been rising fairly steadily since January while prices and new orders for nonmanufacturing were down in May from April, according to the ISM release on June 3.
DeKaser sees a strong correlation between electricity usage and the service economy. The commercial segment of the electric output data that the Edison Electric Institute releases weekly represents certain aspects of the service sector, such as office and retail space, he says. "When you're filling up office buildings, and office buildings are working overtime—and the same for retail stores—that's a good proxy for those sectors." Total electric output for the week ended June 5 was up 10.8 percent from the same week in 2009 and was basically unchanged from the prior week but up nearly 12 percent from two weeks earlier.
Just looking beyond the most closely watched numbers of mainstream economic reports sometimes reveals nuances that appear to contradict headline economic trends. Take the monthly retail sales numbers, whose discretionary spending categories sometimes tell a different story from the headline rise or fall, says Karen Dynan, Robert S. Kerr Senior Fellow in Economic Studies at the Brookings Institution in Washington. That wasn't the case, though, in May, where disappointing top-line retail numbers were echoed by lackluster discretionary sales numbers, she says.
The technology industry continues to demonstrate greater strength than many other parts of the economy. The latest Tech Pulse Index—comprising industrial production, shipments, employment, and household purchases of computers and software—showed May's growth rate of 25.8 percent down substantially from the 32.9 percent pop in April, but still above the 12-month growth rate of 25.2 percent. The 12-month growth rate is the highest it's been since December 2000, which shows how remarkably strong production has been, says Bart Hobijn, senior research adviser in the San Francisco Federal Reserve Bank's Economic Research Dept.
The index is mostly a proxy for technology manufacturing, with employment "the only thing that aggregates well to services, [which] is by far the weakest number in the index still," says Hobijn, who oversees the index. "The rebound in activity is associated with very strong productivity growth, and therefore not employment." In that, technology seems to be following the overall economy. But, as Lynn Reaser, president of the National Association for Business Economics, points out, manufacturing now has a lot of service components in it since most technology products feature accompanying software.
The 41,000 increase in private payrolls in the government's May employment report was extremely disappointing, after the 218,000 gain in April and the 158,000 increase in March, and rekindled doubts about how sustainable the economic recovery is. But component data on the jobs report showed signs of strength, with the hours-worked index climbing 0.3 percent in May after 0.4 percent gains in March and April, and average hourly earnings in the private sector up 0.3 percent from April.
There's considerably more cause for optimism in recent data concerning temporary workers. A May 25 report by the American Staffing Assn. showed May staffing employment up 3 percent from April and up 19 percent from a year earlier. An employment outlook survey conducted by Manpower (MAN), a leading temporary employment agency, showed that 18 percent of 18,000 employers polled plan to boost their staffing levels in the third quarter of 2010, while 8 percent expect their payrolls to decrease and 70 percent see no change in their hiring plans. In addition, employers in 11 of 13 industries surveyed had a positive outlook for the third quarter.
The MasterCard Advisors SpendingPulse, which estimates total retail sales across all forms of payment, is another economic indicator that rides under most people's radar. The June 3 report showed a 3.7 percent decline in U.S. retail apparel sales, and revealed gains in e-commerce, luxury, and jewelry sales, while electronics sales were down.
Yet another lesser-watched gauge of overall economic strength is spending by state and municipal governments, which remains constrained by sharply lower real estate and employee tax collections, a hangover from the recession. Ceridian Tax Services, a unit of Ceridian Corp. that manages tax holdings for about 7,000 state and local taxing jurisdictions across the U.S., has seen substantial increases in the amounts of money that state and local governments are collecting from businesses to cover unemployment payments. That reflects the extent to which government treasuries have been depleted. Unemployment collections in Alabama, for example, have more than tripled since a year ago, and in South Dakota they're nearly two and a half times higher, says Webb Hill, general manager of Ceridian's tax business.
"[States] are requiring employers to put in more money for each employee," he says. "It's probably more expensive for employers with taxes to pay employer state taxes."
To what extent higher unemployment taxes are causing companies to delay hiring depends on the size of the business, says Dynan at Brookings. The job growth she's seen has been concentrated in large businesses, which seem to be flush with cash and recovering faster than small businesses. "To the extent we'd like to see growth at Main Street businesses, the additional burden from [unemployment] payments may be holding back growth in employment in some types of businesses," she says.
Whether mainstream or lesser-known, one drawback of economic data is that they rarely tell as clear-cut a story as people would like. "The economy does not move in a straight line," says NABE's Reaser. "One should not be surprised to see upswings and downswings in the monthly figures. It does appear that the economy is on a track of a sustained recovery in that there are signs that underlying consumer and business demand are kicking up." That suggests the U.S. economy will likely grow at least modestly above trend over the next several months, she says.