Today’s release of the Ceridian-UCLA Pulse of Commerce Index (PCI) confirms what we have already seen from a variety of other indicators which is the economy is slowing down. Even “the Bernank” yesterday was forced to lower his overly ambitious economic growth projections in his recent FOMC statement: “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually…downside risks to the economic outlook have increased.“
The Ceridian-UCLA Pulse of Commerce Index (PCI) is based on real-time diesel fuel consumption data for over the road trucking. 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. The PCI serves as an indicator of the possible future direction of the U.S. economy. Working with economists at UCLA Anderson School of Management and Charles River Associates, Ceridian provides the index monthly. Investors care about this number because it provides a from-the-trenches view of the economy. Economic activity is heavily dependent on trucking and, to a significant degree, economic growth tracks trucking activity and a reasonable measure of trucking activity is sales of diesel fuel for over the road trucking. A stronger PCI indicates a stronger economy and should support equity gains and lead Treasury rates to firm.
The year over year change in the index is now at levels that we start worrying about recessionary pulls. While not indicating an outright recession at the moment – the TREND is more indicative than the number which is a continued misstep by the media to ignore the trend for the sake of a number. The problem is that by the time the number reflects a recession it is too late to react effectively in portfolios.
Furthermore, the year over year change in the index tends to lead the actual indexes themselves so while the indexes haven’t turned down just yet it is most likely going to be reflected in the next couple of quarters. If our analysis is correct, without another round of QE of some sort, we will most likely be facing a recession by the beginning of 2012 which means that the risks of being heavily invested in equities, even after the recent decline, is most likely outweighed by the potential for reward. Of course, we will continue to monitor and adapt our out look as data is made available.