Commerce picked up in June - Getty Images via @daylifeA real-time index measuring the road movement of goods across the U.S. via the consumption of diesel fuel rose 1% in June after two consecutive months of losses, indicating that industrial production and second quarter GDP growth will be modest at most, while showing that no real drivers of growth appear set to “pick up the baton”.
Much more accurate than a survey, the Pulse of Commerce Index (PCI) rose a meager 1% in June, leading the index’s chief economist, Ed Leamer, to call it a “tease.” While the PCI recovered after two consecutive months of declines, Leamer explained it shows “more of the same sluggish growth” as markets are completely in the dark as to what’s going to happen next.
The PCI, prepared by Ceridian and UCLA’s Anderson School of Management, provides a real-time look at the state of commerce by tracking the volume and location of diesel fuel being purchased by trucks.
Markets have been over-responsive to news lately, according to Leamer, who noted “you get a week of bad news, everyone runs from equities into bonds, then a week of decent news and everyone runs from bonds to cash, and then a week of good news sends everyone back into equities, this makes for a crazy market.”
The last substantial driver of growth was inventory restocking in late 2009 and early 2010, said Leamer, noting that “it is very hard to identify what component will pick up the baton” and take the U.S. economy forward. As consumer deleveraging continues, big ticket items that fuel economic expansions, like cars and houses, are facing lower demand. (Read No Recovery Possible While U.S. Consumer Continues Deleveraging).
High energy prices have eaten into consumers’ purchasing power, who are already suffering from a weak labor market. “There is no question that energy contributed, and maybe determined this latest drag on growth,” said Leamer. (Read Oil Prices: Brent-WTI Spread Above $22 And Here To Stay).
A growing labor market supports positive feedback loops that fuel consumption and create jobs. But, with the construction sector devastated due to an oversupplied market and the ever-present foreclosure pipeline, and manufacturing jobs on a downtrend since the early 1990’s given globalization and technological advancement, job markets are “setting a post-war record for sluggishness.” (Read Job Cuts Accelerated In June With Government Leading The Donwsizing).
The PCI indicates that second quarter GDP will grow 1.8% on an annualized basis. The first estimate of the Commerce Department is set to be released on Jul 29. Industrial production, expected on July 15, is expected to be modest, at 0.17% according to the index.
A few sectors have been performing well on the jobs front, Leamer said. Durable manufacturing, especially the auto sector, had experienced a substantial rebound since Detroit’s Big Three, General Motors, Ford, and Chrysler, were put on their knees. Above trend growth was also observed in mining and utilities, noted Leamer. (Read Jobs Report Sucked, But S&P 500 Will Finish Year Up 8% To 10%).
Still, the index is a further indication that the U.S. economy remains in a soft patch. In his address to Congress, Chairman Ben Bernanke told policymakers that the recovery continues at a lower than expected rate and that further monetary stimulus, or QE3, is not off the table. While Bernanke was accurate to say inflation and the effects of supply chain disruption in Japan would prove to be transitory, he still holds on to his prediction that economic activity will pick up in coming quarters. According to the PCI, it doesn’t seem like the next couple of quarters will show much growth at all. (Read Bernanke Fights Ron Paul In Congress: ‘Gold Isn’t Money’).
