Coincident Indicators of Recession: VMT, Heavy Truck Gross sales, Sahm Rule

Ever wonder if automobile miles traveled (VMT) does job of predicting recessions. Surprise no extra. First check out what VMT does over recessions, versus heavy truck gross sales (advised by Calculated Danger at some factors), and the eponymous Sahm Rule (actual time model).

Determine 1: 12 month development price within the automobile miles traveled, n.s.a. (teal), in heavy truck gross sales, s.a. (tan), and Sahm rule indicator – actual time (black). Sahm rule is 3 month transferring common unemployment price relative to lowest unemployment price in final 12 months. Orange dashed liine denotes threshold for Sahm rule indicator. NBER outlined peak-to-trough recession dates shaded grey. Supply: FHA by way of FRED, Census by way of FRED, FRED, and NBER. 

It’s laborious to see, however the 12 month change in VMT declined a number of months in the past (the extent is decrease than pre-pandemic), whereas heavy truck gross sales are up, y/y. The Sahm rule is close to zero (it wants 0.5 ppts to breach the edge).

How do these variables do in predicting recessions (peak-to-trough, as outlined by NBER BCDC, not the amorphous definition utilized by sure people)? Right here’re the probit regression outcomes over the 1970M01-2022M10/M11 interval (the place I convert the Sahm rule variable to a dummy variable (Sahmruleindex) taking up a worth of 1 if the Sahm rule variable exceeds the 0.5 threshold).

Discover that the y/y development price of VMT doesn’t clarify quite a lot of recessions, in keeping with the McFadden R2. The y/y development price of heavy truck gross sales really explains probably the most. The Sahm rule index has an intermediate explanatory energy of 18%. The Sahm rule is meant to sign a recession has began, not essentially a recession is at the moment ongoing.

Beneath I plot the anticipated chances related to the estimated VMT and heavy truck gross sales probits, and the implication of the Sahm rule (nonestimated).

Determine 2: Probit estimated recession chances from 12 month development price in VMT (teal), in heavy truck gross sales (tan), and implication from interpretation of Sahm rule (black). NBER outlined peak-to-trough recession dates shaded grey. Supply: NBER, and writer’s calculations.

Because it’s laborious to see what’s happening, notably in current recessions, I focus in on the interval beginning simply earlier than the Nice Recession (comparable to Determine 1).

Determine 3: Probit estimated recession chances from 12 month development price in VMT (teal), in heavy truck gross sales (tan), and implication from interpretation of Sahm rule (black) (element). NBER outlined peak-to-trough recession dates shaded grey. Supply: NBER, and writer’s calculations.

Now, VMT would’ve accomplished higher if I truncated the pattern at 2019M12, given the acute nature of VMT conduct through the pandemic. Nevertheless, the McFadden R2 solely rises to 12%, and nonetheless  wouldn’t have breached the 50% threshold for the 2007-09 recession (however would’ve predicted a recession in 1996).

Therefore, I stay skeptical of Mr. Kopits’s assertions (in a rejoinder to Macroduck’s comment) that VMT is the lodestone for recession declarations, viz:

…so that you’re saying there have been 1.1 m extra jobs and gasoline consumption and VMT had been falling on the similar time? So not solely did these further 1.1 m employees not drive to work, these with jobs had been additionally driving much less. It’s potential, certain. But when I’ve to adjudicate between the CES and the HH survey, the info is extra in step with the HH survey. However that’s not what Menzie did. And neither did you. However I did, and because it turned out, that inference seems to have been right.

My level is that VMT is especially unreliable from a proper standpoint, and it’s affordable to presume a structural break within the employent-VMT relationship given current developments, together with working from house.

As an instance the potential break on this employment-VMT relationship, I convert to quarterly information the month-to-month, and run a regression in first log variations. A recursive residuals one-step-ahead Chow check rejects stability across the pandemic.

Determine 4: Recursive one-step forward residuals from indicated regression (blue, proper scale), 95% interval (crimson dashed, proper scale), chance of no change (blue circle, left scale). NBER outlined peak-to-trough recession dates shaded grey. Supply: writer’s calculations utilizing EViews. 

In sum:

• One shouldn’t depend on VMT to deduce employment given the structural breaks recognized within the information.
• There’s little indication that as of November 2022, or in 2022H1, that the financial system was in recession (as outlined by the NBER Enterprise Cycle Courting Committee).

In fact, random observers can outline a recession any approach they need, in order to make their declarations legitimate. I.e., one might call a recession one where the Michigan index falls below a certain value. However that may be exterior of the spirit of the enterprise cycle literature.

Addendum, 2pm Pacific:

Mr. Kopits additionally advised use of gasoline use. I additionally estimated a probit regression utilizing 12 month development price in gasoline provided (EIA). Whereas the coefficient on gasoline is statistically vital, the McFadden R2 is low (0.04), and fails to foretell any recession save the 2020 one (utilizing a 50% threshold).