Slow recovery keeps on truckin’

Apr 12, 2011

The economy may not be as vulnerable to $110 oil as you might imagine.

That’s one message out of the latest Ceridian-UCLA Pulse of Commerce Index. The index rose 2.7% in March, wiping out declines in the first two months of 2011 and suggesting a modest economic recovery remains on track, in spite of the soaring price at the pump.

The index tracks U.S. diesel fuel use and as such is a good proxy for industrial production, via truck deliveries of supplies and the like. The March report points to a 0.8% rise in the Fed’s industrial production numbers, due out Friday, and leaves the economy on track for a roughly 3% gross domestic product gain in the first quarter.

“The recession is over, but we are not yet experiencing a robust recovery,” said UCLA economist Ed Leamer, who oversees the index.

The strong PCI report comes at a time when U.S. gasoline demand has fallen for four straight weeks, raising questions about the sustainability of the recovery.

Crude oil prices fell $6 a barrel over two days this week after Goldman Sachs issued a report citing the risk of a commodity selloff. Goldman’s caution was prompted in part by a drop in automotive miles driven, reflecting the surge of gasoline prices near $4 a gallon.

It seems only natural to assume that falling diesel fuel use might follow a drop in gasoline consumption. But Leamer said so far there is no sign of that. He believes that drop-off would happen with a lag of months, if at all, because much of what the PCI tracks is the shipment of goods into inventories.

A sustained high gasoline price could, over time, translate into lower demand for consumer goods, by taxing stagnant incomes. But for now the bigger factor is the expansion of payrolls, which appears to be gaining some steam more than a year after other economic indicators showed signs of stirring.

“March represents the 16th consecutive month of year-over-year growth in the index,” said Ceridian’s Craig Manson.

With job creation only starting to gain steam and home construction near its lowest level ever, there are not a lot of serious domestic threats to the U.S. recovery. That is, excluding the chaos in Washington, where a failure to confront our long-running profligacy could yet blow up the financial markets at any moment.

“You can either start spending a little less or you can charge a little more to your Chinese credit card,” says Leamer. “But it is looking like the bond market’s going to be the one that ends that game, not anyone in Washington.”

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