The Ceridian-UCLA Pulse of Commerce Index (PCI), issued by the UCLA Anderson School of Management and Ceridian Corporation, rose 0.2 percent in December following the 0.1-percent increase in November and the 1.1-percent increase in October. Unfortunately, the combined effect of the three consecutive positive months was not enough to offset the weakness of trucking last summer and the PCI in December 2011 is 1.2 percent below its June 2011 level and 0.7 percent below its level a year ago in December 2010.
With all three months of the fourth quarter now available, we are able to make an informed assessment of the likely rate of growth of fourth quarter GDP. The fourth quarter PCI was up over the third quarter; but only by 0.5 percent at an annualized rate. The good news here is that this positive 0.5-percent growth rate for the PCI in the fourth quarter was much better than the third quarter, which suffered a decline at an annualized rate of 4.2 percent.
The PCI annualized rate of growth of 0.5 percent in the fourth quarter is consistent with an estimated GDP growth of 2 percent or less.
Although Wall Street economists have jacked up their "backcasts" for fourth quarter GDP growth to 3 percent or higher, the fundamentals as indicated by the fourth-quarter PCI are not so favorable.
Many of these economists are basing their improved forecasts on expectations regarding a healthy contribution of inventories to GDP growth. The PCI does not support this view. The PCI measures inventories destined for factories, stores and homes, and the third quarter decline in the PCI correctly anticipated the large negative contribution of inventories to GDP growth. The BEA estimate of the inventory contribution to GDP growth for the third quarter has been varying around -1.5 percent as the data are revised, and is currently at -1.4 percent. That is almost as large as the estimated GDP growth of 1.8 percent. Absent that inventory negative, the rate of growth would have been 2.2 percent.
The fourth quarter PCI of plus 0.5 percent suggests only a modest positive contribution of inventories in the fourth quarter, which implies a GDP forecast that is not as optimistic as many Wall Street economists believe.
However, with real retail sales growing more rapidly than the PCI over the last two quarters, the first half of 2012 may be an inventory-rebuilding period, allowing inventories to make a substantial contribution to GDP growth. This would be very supportive of the recent improvement in the labor market, which may finally be entering a positive-feedback loop during which more jobs help create even more jobs.
The weakness in the PCI this month translates into continued weakness in the PCI-based forecast for industrial production. The predicted value for December's industrial production based on the PCI is 0.29 percent.
