Gauging Economic Movements

Trying to quantify economic movements is problematic. What metric would provide acceptable results?

Economic metrics use pulse points. A pulse point is any point in the economy which gives a representative value for that activity. As much as we have computerised the world, our economic data gathering methodologies do not measure the entire economies – but measure only a portion.

You can think of the way you measure your blood pressure. One point in the body is selected to measure the pressure – and doctors have proven over time that that one point pressure reading is correct for the whole body.

Unfortunately, economics has no perfect pulse points. Each one has different flaws:

• Is the data being corrupted for the good of the data issuer? Government data should always be viewed with a certain amount of scepticism. Politics are politics everywhere in the world. In the USA (which issues the most timely data of advanced economy), the data gathering system uses non-political workers – but the department heads are political appointees. All government positions are political in China. On a scale between 1 to 10 (with 10 being a reporting system which is not influenced by political forces – the USA would get a “7” while China would get a “1”.

• Even business or private sources have reason to corrupt data. Banks benefit by showing lower loan default rates. Unions have reason to exaggerate membership. Car manufactures exaggerate sales. Some data sources are more reliable than others.

• All data gathering methodologies are flawed. Some data methodologies have been proven more or less accurate over time. Other methodologies are volatile month to month – but when averaged over time, they reveal a good picture. And some methodologies simply present the wrong answer.

• In an effort to make data more accurate, economists try to adjust data with factors such as seasonal variations. As an example, during rainy seasons there is less construction than in dry seasons – so economists have an adjustment factor for each month. Over time, a simple methodology to gather data becomes very complicated. The more complicated the methodology, the chance grows that the economic data being released is wrong.

• Is the data being gathered really from an economic pulse point? An example is unemployment rates. Since 1990, all advanced economies prosper even though dogged with high unemployment.

Transport economic pulse points are the most important validators of the data presented by governments, business, and private sources. As we know all these pulse point, or economic indicators, are flawed to varying degrees – we use other indicators such as transport pulse points to check the results.

If a government or business indicator is implying the economy is improving, and the rail and truck transport volumes are declining – then the government or business indicator is probably wrong.

Economic analysts in the USA have a simple system to determine freight volumes in a timely manner – they use the amount of diesel being consumed. Unlike other countries, almost 100 per cent of diesel is used to fuel the vehicles which haul freight – trucks and trains. Little is used for passenger cars or to generate electricity.

Diesel use in the USA is seasonal. The highest usage is in the first quarter of the year (January, February and March), while the lowest usage is in the fourth quarter of the year (October, November and December).

As a word of caution, analysts should never rely on single methods of determining economic activity – but need to view many varied and different types of indicators. From time to time there are relatively abrupt changes in technology (or political events) which alter patterns of consumption.

However, this simple methodology using diesel as a proxy for transport volumes is a very accurate method of analyzing and validating the USA economy.

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