Executives at Bloomington-based Ceridian Corp. are closely watching the industrial production and capacity utilization numbers released by the Federal Reserve Board this morning. And it’s not because they’ve made big bets on the market.
Last week, Ceridian introduced a new economic indicator that predicted the Fed would report slower growth — 0.6 percent — in industrial production this morning.
The Ceridian Pulse of Commerce Index (PCI), launched a month ago, tracks real time, at-the-pump purchases of diesel fuel by trucking companies across the United States. A new economic indicator doesn’t come along that often. The PCI’s success will depend on how useful it is in predicting future moves in economic activity.
And how did it stack up against the Fed numbers? The new PCI index called the direction right, but the magnitude of the dip was larger than anticipated, affected by hard-to-predict weather disruptions. Industrial production edged up 0.1 percent in February, following a gain of 0.9 percent in January. “Production was likely held down somewhat by winter storms in the Northeast,” according to the Fed release.
“At its core, Ceridian is a human resources and payment processing company,” said Todd Dooley, senior vice president of finance at Ceridian. The company was seeing interesting economic patterns in the data over the years and sensed there was something economically relevant in the data. The millions of transactions Ceridian process, from payrolls to pre-paid purchase cards and credit cards, “give us tremendous insight into the direction of the U.S. economy.”
In the midst of the recession, Dooley and other Ceridian executives asked how they could use their data more strategically, to “gain new insight into the economy.” But Ceridian executives knew they couldn’t develop it on their own. “We know lots of stuff, but we don’t know how to apply it to the economy,” Dooley said.
Ceridian brought in an econometric consulting firm, Charles River Associates out of Boston and the Anderson School of Management at UCLA, who spent nearly a year evaluating the billions of transactions within Ceridian’s databases. Ed Leamer, who heads up the UCLA Anderson Forecast and is lead economist on the PCI, said that gaining access to Ceridian’s mountains of data was like being offered “a room full of candy.” In exchange, they had to identify data that could most readily be turned into a useful index that measures the health and possible direction of the U.S. economy.
Even in the services-heavy U.S. economy, manufactured goods still represents 35 percent of gross domestic product, Leamer said, and is one of the most volatile components. By the fall of 2009 they centered on Ceridian’s diesel fuel sales data. Leamer was “instinctively aware of the tremendous predictive value,” the data could provide in tracking the movement of raw materials, manufacturing parts inventory and finished goods heading to distributors and consumers.
Creating a software code to indentify the relevant transactions, testing the index and the validating the data took six to eight months and a lot of software programming. In the next month, Ceridian plans to file a patent on “the creative logic set” used to sift through the data, according to Dooley.
But Leamer and Ceridian felt pressure to get the index out quickly if they were going to contribute insights into the current situation. They also feared that if they waited too long, the recession would be over and they would “lose the opportunity to have a market impact.” They launched the index in February with 10 years of historical data and continue to refine the index, most recently improving seasonal adjustments.
The Pulse Index has been picked up by some wire services, and an investment blog but is not yet widely followed. That will come over time, depending on how good it is in predicting near-term moves in the economy. Leamer pointed out that if the index had been around two years ago, it would have picked up the steep downturn that most forecasters, Leamer included, missed in the second half of 2008. In looking back, the Pulse Index was sharply declining in the second quarter of 2008, “giving us a real warning that the second half was not going to be good,” he concluded.
It occurred to Leamer when he was looking at the fuel sales data overlaid onto a map of the nation’s interstate highway system that the index can provide previously unavailable insights into the economy.
“I’m a big believer in visual displays. You can’t understand data until you visualize it,” he said.
Looking at the map, he realized the 7,000 truck stops along the interstates are real-time monitoring stations, providing “extremely important” geographic information about the movement of goods in different regions of the country. He said that could allow economists to track movement into and out of ports and distribution hubs as well as identifying specific areas that are more representative of the national economy.