Miles Data Predicts Big Economic Slowdown
Posted by Stuart Staniford on October 24, 2005 - 8:22pm
Let me first say a little bit more about how the Federal Highway Administration data is gathered. I read the executive summary of the FHWA Traffic Monitoring Guide that they put out to advise the states on how to do this. Basically, FHWA is getting data from all the states and compiling it. The data is based on roadway collection devices (the bumps in the road you drive over). A state will have a network of permanently installed data collectors on key highways and traffic points to give constant real-time data on traffic volumes, and then will have a program of mobile traffic collection points that cover all the less important roads. They then do some statistical interpolation to figure out how the lesser roadways probably varied between measurements, based on what the permanent data collection points show. They try to cover all those lesser roadways with a measurement every few years. Thus even though some roadways are only surveyed occasionally, the fact that there's a permanent infrastructure of collection points should allow them to produce decent approximations to the right answer even on a short time scale.
Overall, it sounds pretty reasonable to me. They've been collecting this stuff since 1936, so they've had a little time to figure out how to do it. Obviously it's quite hard to assess how well all the individual states do. They have an incentive to cheat since some federal highway funds get allocated based on these numbers. I hold the view that corruption of government bureaucrats in OECD countries is exceptional rather than pervasive, so I would tend to trust that the data are by and large ok, despite that. Some of our more conspiratorial-minded commenters might draw a different conclusion. To some extent the proof of the pudding is in the eating; probably the best evidence for the data being accurate is that they show interesting credible responses to oil related events and a high correlation with GDP. It would seem impossible for that to be the outcome of a series of made-up numbers by corrupt state highway agencies.
Anyway, after looking at the August 2005 FHWA Traffic Volume Trends (the most recent available), I made this plot of total vehicle miles for the last three years:
The y-axis is daily vehicle miles (in billions) averaged for the month in question on the x-axis (note that the graph is not zero-scaled, which I generally prefer, but here we are more interested in focussing in on the changes than observing the generall flattish trend). Obviously, the most striking thing about the data is that 2005 is struggling to get above 2004 (whereas 2004 is generally comfortably more than 2003).
To investigate that further, I took a look at the implications for the year-on-year percentage change graph of miles and GDP. I could compute total miles for 2004 by adding up the monthly totals (I verified that this procedure for 2003 produced the same answer as the previously known 2003 annual total to within negligible errors for the purposes of this graph). That let me create the 2004 change from 2003. Then I computed the difference between the total for the first eight months of 2005 and the first eight months of 2004 (which should correct for seasonal effects pretty effectively), and added that change to the graph. We get:
Uh, oh! Look at that drop in growth rate from 2004 to 2005. There's never been a year in the past 35 years when that big a drop in the red line was not followed by a big drop in the blue line the same or the following year. This is particularly so when the blue line is as high above the red line as it is in 2004. Look at 1984-1985 for the closest precedent. So that suggests that the chances we'll drop to GDP growth at or around zero in the near future are excellent.
That's the bad news. I guess the good news is that since at least the spring of this year, gas prices have been having a visible effect in reduction of driving (and thus demand for oil). I speculate that serious efforts in switching of vehicle sales to more efficient vehicles started earlier than we realized too. Maybe that's why the car companies felt the need to put on a fire-sale over the summer.
There's a lot more to get out of this monthly data. There's all kind of interesting wiggles that must mean something (since the statistics are enormous here, even little wiggles should be caused by something or other). There's regional data, and state-by-state data too, so once September comes out we can start having a look at what Katrina and Rita actually did to driving around the country. This data is a goldmine.
Previous Posts in the Series
The earlier posts in the series considered the following subjects:
- A discussion of the stability of the mix of consumer spending
- Considering the productivity and efficiency of transportation
- What the US economy did to become less oil intensive
- Behavioral driving responses to oil shocks
- Whether the GDP/miles driven relationship is the same in Europe.
- Considering in much more detail the connections between US annual GDP and driving data.
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I really think this may ultimately be a way to reduce our liquid fuel usage and buy us time. We could start with 'the third friday of every month is work-from-home', say for a year, so as to get corporations used to it, then go to 2 fridays a month in 2nd year and during the third year, everyone work from home on friday - people would probably be happier, better rested, and just work either 10 hours on Mon-Thurs or 8 hours from home on Friday - as Robert Hirsch stresses - we arent facing an immediate energy crisis so much as a liquid fuels shortage - FRIDAYS NO DRIVE DAY! (Of course the politicians will say this will kill the economy - but Id like to find some analysis suggesting it wont)
1995 is the year the Internet went mainstream.
The first Netscape browser was released.
Microsoft released their Windows 95 operating system.
These two events revolutionized the way business did business.
Documents no loger had to be Fed Ex'ed overnight. They could be emailed. People could start chatting online. Less need to drive and fly to every meeting.
Maybe the Internet is the bigger reason why big red is trending down?
It seems useful to investigate aviation - it's transactions and economic activity, but removes the land use factors that seem like they'd come into play a lot in the highway mileage.
The problem here is that we don't really know what this driving really is, what mechanism connects it to the GDP. The share of industry in the GDP has diminished and the share of the trucking also. This could explain the diminishing volatility.
This might be interesting if we were trying to find a new leading index for the GDP and use it for trading. But what it is we are now trying to find out relating to the Peak Oil? Will we try to see how effectively the oil prices affect the fuel consumption in the US? Then the answer is that they affect it a little bit but not much so far.
But this is not a good question. The Peak Oil is a physical phenomenon. So we might ask, how high the oil prices will go when the supply goes down? Cutting the demand is easy in this situation - less oil, less consumption. But the price is only for allocating oil. It is not directly related to the physical supply. And the US is not alone in the world. Its share of the world oil use is only a quarter.
Would we like to know how diminishing oil supply affects the US GDP? We know already that it affects it. What we don't really know, is what happens when the oil supply diminishes for a long time - when world oil is in permanent decline.
Stuart is of course concerned with the oil efficiency of the US economy. But this is not the quite right question. It will not tell how the economy will behave. Highway driving is only one part of it. The total energy situation and efficiency is here the most important factor. The oil consumption statistics show that oil has been substituted for some extent. Changing lifestyle is much easier than getting more energy. Natural gas is now the real scare. Just move to electric cars if you could find enough power for that. Here we have the problem.
Then there is AE. Wind is cheap if intermittent, and solar is relatively costly but coming down. Even if wind can only displace 30% of demand, that would still turn a 50% cut in motor fuel demand into a 65% cut, and a 60% cut into a 72% cut. Once propulsion is electric you have a lot more ways both to boost efficiency and to substitute.
But more to the point, are you sure about the second graph? It seems to me like the miles driven between 2005 and 2004 are not that far apart in the first graph, yet there's a huge drop that shows up in the second graph.
Wouldn't that 2005 line logically be lower in most points compared to the 2003 line for this data to be accurate?
It was obvious from some of the EIA gasoline demand graphs that have been posted over the last few weeks that there will be a significant drop in miles for September following the Hurricanes and Bush's pleading for you all to use less petrol.
Do you know when the figures are due out? What's the possibility that these might get 'fudged' to stop panic? Mind you, I doubt anyone else is analysing these figures as close as you are.
Very interesting, thank you.
"diesel went UP to 3.43 today! While unleaded went down to 2.39 here in southern WI. WHats up with this???"
to which this reply was given:
"It's quite simple. A political decision was made to have refineries go to max gasoline output v. diesel and heating oil. That way, because of the loss in production and downed refineries as a result of the hurricane damage on top of a already tight supply and refinery situation, the price of gasoline could be kept lower, minimizing the inevitable political fallout and anger towards the administration. There are more gasoline consumers ('votes') than diesel purchasers, to put it crudely. The consequences for such a decision will continue to reverberate for months to come. For one, it means prices on store shelves will rise as a result of trucking expense increases, but that takes time to wend through the system, whereas gasoline price increase fallout would have been dramatic and immediate. Also, the decision-makers gambled they could get productive and refinery capacity up quickly enough to mininize the damage from rising diesel and heating oil prices, before the onset of winter. My bet is that this is a losing game, and the refined product version of 'playing the float' will have to end sometime, and then that means it's raised prices across the board."
> "It's quite simple. A political decision was made to have refineries go to max gasoline output v. diesel and heating oil."
Who came up with this insane quote?!!! Do they honestly think refineries like to make politicians happy instead of making money?! Howabout record high prices for gasoline making it a no-brainer to switch over to gasoline manufacture?!
Man, I really hate people who see a conspiracy under every single simple mundane business decision. Gasoline shot to $4 and $5/gallon following Katrina, with THOUSANDS of news articles about shortages, it's no damned wonder the refineries "switched!"
It's not a political decision, it's a BUSINESS decision.
Thanks for the rant... Expect soon that they will DROP gasoline production and increase diesel production and someone else will say "Political decisions!!!" and point fingers.
Get over it. The refineries want to make money, end of story.
Thanks for bringing that little gem over!
Most of the reports I've read of him describe as either "exactly the same as Greenspan" to "more hawkish than Greenspan". Considering I have a rather low opinion of Greenspan (housing bubble, et al), this slightly worries me in regards to Peak Oil. My position has always been that we really need a controlled, long-term recession to burn off some of this unstable growth we've had and to push back the peak. Also, when Peak Oil starts to be felt (which probably will within his term), I feel that he would aggressively pursue the typical inflation/deflation countermeasures instead of addressing the root problem. Using typical controls seem like they would exacerbate the problem.
Anyway, what does everyone else think of this nominee? Also, how does the nomination process work for Federal Reserve chairs? I suppose "advise and consent" doesn't really apply to quasi-governmental agencies. Also also, anyone have any information on what his trade policies are? I'd imagine it'd be pretty much the same neoliberal theories that run so popular nowadays...
But your post gets to the root of the matter, which is this: Peak Oil is not a reality as far as our decision-makers goes. I'm sure it was hardly considered at all in switching out nearly identical heads of the Fed. "...burn off some of this unstable growth we've had and to push back the peak"? I'm afraid not. The coming recession will just be another usual episode as far as these clowns are concerned. Tweak the interest rates, the money supply, the trade deficit, the federal deficit whatever. They are oblivious to the long-term trend in energy supplies.
Interesting to note that there wasn't one positive response to the man. I made my opinion known; more of the same isn't enough to fix the crisis. The thing is, in regards to the one post, even though the government is inept, especially this one, I'd find it hard to say that the idea of Peak Oil isn't mentioned at all in government meetings.
Although, maybe the Bush administration treats administration Peak Oil proponents the same as they treat generals who disagree with their war policy (ie, FIRING).
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
See the full article here: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
"....In Nebraska, the shortage is a little more severe.
Four out of the state's 10 diesel terminals have run dry, leading Gov. Dave Heineman to ask the U.S. Environmental Protection Agency for a waiver to allow the sale and use of high-sulfur content diesel fuel.
http://www.aberdeennews.com/mld/aberdeennews/news/12978840.htm "
"I have been following the diesel supply reports from Flying J and TA travelcenters (two big truckstop chains). The initial shortages reported after Rita have mostly passed, but a new crop is appearing in parts of the midwest.
Last week, Flying J started to report low supplies in Nebraska and Missouri. Over the weekend, Davenport Iowa and one station in Illinois were added to the list.
Just today, TA announced that it is limiting diesel purchases to 50 gallons at its Missouri and Florida locations.
I have a feeling that the diesel situation is much tighter nationally than the NYMEX price action would suggest."
and from another poster:
"Suppose diesel supply is 2% less than demand this winter. You know what happens? 2% less stuff gets trucked from farms and factories to stores. The physical sector of our economy will shrink by 2%.
There is no SPR for diesel. European stocks are low. Any shortfall will cause a direct reduction in economic activity.
Of course with NG supplies running 5% below last year, there may be significantly less production anyway.
All the signs are coming together. This winter, he US economy is going to be choked back by fuel constraints like a charging bulldog that has reached the end of its chain.
And then, as the factories shut down and the semis are parked, Joe Kernan and Ted David will be high-fivin' ..... Demand Destruction, Baby!!! "
Not sure if the situation is this extreme...Perhaps another thoughful post on tight diesel supplies?
Of course, this means that greenhouse emissions in the West will increase further.
It strikes me that in all these analyses we are dealing with relatively small differences between a given year's GDP and daily vehicular miles and those of the preceeding year. This raises a question in my mind as to what is the accuracy of the GDP and DVM numbers in the first place.
Any aggregated compiled statistic has a certain degree of unavoidable built-in error, which is OK so long as you know what that margin of error is. Do we know what the margin of error is in the GDP and DVM numbers?
If the GDP and DVM data were each plotted as a band width reflecting the margin of errror instead of as discrete points, I wonder how much of the year-to-year differences would disappear into the error band?
Just wondering.
I've also uploaded my USA Energy Reserves update for October wherein i am forecasting the working gas low cycle for March 2006 at 950-Bcf: http://trendlines.ca/economic.htm#USAReserves
There is a nice piece by Ruchir Sharma of Morgan Stanley looking at the effects of oil prices on the business cycle. This has been syndicated in newspapers worldwide--I suspect it is a PR release by Morgan.
His basic thesis is that OPEC is recycling its petrodollars more vigorously: consuming 83% vs. 27% in 1974. They are putting the rest into global capital markets, which has the effect of keeping interest rates low. Sharma doesn't say it explicitly, but both consumption and capital formation are providing a huge Keynesian stimulus that is warding off recession.
Sharma says the link between high oil prices and slow growth is "broken," but I think it's just disguised by OPEC spending patterns. If they change their fiscal policies, the old pattern would re-emerge.
There is another issue as well: we're using all of our stimulus ammunition now, in non-recessionary times. In the US, there is high government spending including a war, high budget deficit, high trade deficit, high personal consumption and borrowing, zero savings rate, low interest rates. When a recession comes, there will be no further stimulus to apply. Article at:
http://www.etintelligence.com/etig_root/productsandservices/columns/Ruchir%20Sharma/pdf/20%20septemb er%202005.pdf
It's not so good for all the people that are providing us with goods and services now, of course. We will still import ore, oil, and tropical agriproducts from the third world, and specialized high tech and industrial equipment from the first world, but damn little from China.
I'm not being snarky, I'd really love to know that you're thinking.
I love the idea of good jobs at good wages, with more locally-based economies. But I don't see a way to reverse globalization unless we see worldwide economic collapse combined with an inability to buy abroad (A Mad Max Road Warrior economy).
The move offshore looks like it is still accelerating, now with higher spec service jobs going abroad--engineering, tool and die work, airframe maintenance and rebuilding, technical customer service, and so on. I don't think the high paying jobs at Delphi are coming back. I think those parts, and maybe the whole GM car, are more likely to come from abroad.
Don't forget that the capital to reindustrialize is still being given away, month by month, to all the trading partners that the US has a deficit with. In August, another $18.47 billion went one-way to China alone, with a additional $17.2 billion on crude oil, and extra $23 billion to other countries. That would build a lot of factories.
What might be interesting is looking at Consumer Confidence and Miles to see if you could predict Consumer Confidence without a complex survey and other data. That might confer that sending will drop thereby lowering GDP.
I don't know if you still read posts here, but anyway.
The reason why 2004 and 2005 GDP doesn't follow miles driven is that the GDP data is bogus:
You should really read the whole Letter:
http://www.gold-eagle.com/editorials_05/willie030805.html
For Q4/2005, he expects there to be "even more distortion of the GDP, which in all likelihood is going to be negative, but reported positive. Yes, a recession in real terms will be endorsed as growth. " (emphasis mine)
If that is true you will not arrive at a correct conclusion, because the last years of GDP look like disconnected from miles driven. Now you know why.
With real GDP data the relationship would hold even in the last two years. Impressive!!!
Your work is really great. I eagerly await the addition of September to the chart (maybe with a corrected, real GDP?)
You've touched upon something I have suspected for some time: that this thing we call the GDP is nothing more than convenient fiction that government economists use to convince themselves that things are OK.
I am not an economist, so I cannot delve into the fine workings of how the GDP is computed and used. But from what I know about the things that are included in the GDP and the various adjustments (i.e., fudge factors) that are used, I am convinced that GDP numbers only very weakly reflect reality.
Many years ago I was with a consulting firm that did much work for the EPA analyzing the economic impact of new air and water pollution regulations on various industries. As such I worked with in-house economist and business analysts to estimate industry-wide future pollution control costs, the objective being to generate unit pollution control costs in say dollars per ton of steel, or dollars per barrel of oil, etc. With all of the assumptions, outright wild-ass guesses, and gross averaging, in my view these numbers were next to useless. Yet, EPA would publish these and people would use them as if they were handed down from above. I think the same mechanism is at play in the generation and use of GDP numbers. Which is why I don't trust them.
But while all governments do that, European ones included (or disguising debt numbers, etc,), in the USA it has arrived to grotesque levels. A very important thing to take into account while calculating the GDP is inflation. If you don't, an economy with some inflation which doesn't grow, will show greater GDP numbers just because the price increase. It seems like the US is reporting 1% higher GDP than it should be. When energy increases GDP numbers increase as well because they don't discount it. That's fraud.
My question is this. While it may be possible to consider the dynamics of production and distribution in a contraction scenario, what happens to the money supply itself in a prolonged contraction? Will there be sufficient "grease" to keep the wheels of commerce turning, albeit at a slowing rate? Obviously the money supply does contract (painfully!) from time to time, but are there foreseeable sources of instability that could make this even more disruptive than a long-term recession?
I'm not sure what conclusions to draw. I tend to agree with those who argue that GDP has become more and more a function of financial gyrations (such as the real estate bubble of the past 4 years) and less a function of employment or productive activity. We know that GDP has expanded since 2001 at the same time that labor force participation (the percentage of the adult population working or looking for work) has dropped. Also, GDP growth is measured using a deflator that many people think exaggerates growth. So, it is probably true that the real economy since the mid-1990s has not been as rosy as business journalists and Wall Street spinmeisters make it out to be.
That said, I think that it is possible to have a slower increase in miles driven without a significant drop in real economic activity. The high gas prices of recent months have led to sharp increases in transit ridership around the country. People are still going to work and producing, they just aren't driving there. Probably people are taking fewer weekend trips out of town and contenting themselves with trips to restaurants and movies closer to home. In this case, money is stil being spent without as many miles being driven.