Americans: Driving More, Spending Less, Losing Faith?

Via ConvergEx's Nick Colas,

If we measured the U.S. economy only by how much Americans were driving around, you’d have to be surprisingly optimistic about the current pace of growth.  Based on the latest government data (May 2015), miles driven have increased by 3-5% year-over-year every month since December 2014. That’s better than either GDP growth or base population growth. So what gives?

 

First, the long run correlation (1970 – present) between miles driven and incremental employment growth is 45%.  That makes sense – over 80% of Americans commute in a car – and highlights an improving labor market picture.

 

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At the same time, the 6 month average growth for miles driven is +4%, versus just 2% for employment growth. The balance, therefore, is likely related to discretionary driving tied to lower gasoline prices.

 

Now, if all these folks would just spend some money when they got out of their cars, we’d have a real economic recovery...

The Great Recession took its toll on driving, of course, but far less than you’d think.  From a peak pre-Crisis total miles driven of 3,039 billion miles (12 months ending November 2007), the trough was 2,942 billion (12 months ending November 2011).  That’s a drop of just 3.2%, showing just how much Americans rely on their cars.  Of course, once you factor in driving-age population growth of 1% that number looks a little starker. Still, there was all kinds of chatter as miles driven declined over this period about how Americans rode their bikes to work now, and how hipsters were forgoing cars to live in Brooklyn and that teenagers didn’t even care about getting a driver’s license. 

Those automotive obituaries were premature, to say the least.  Starting in July 2013, miles driven began to accelerate.  In June 2014, the 12 month growth rate exceeded 1% for the first time since the Financial Crisis. Then, in January 2015, it went past 2%.  For the year ending May 2015, the most recent data available, it is 2.9%. Looking at individual months, December’s year over year growth was 5.0%, and January 2015 was 4.9%. 

A few words on the data behind this analysis before we draw some economic conclusions:

The U.S. Department of Transportation gathers and publishes “Traffic Volume Trends” monthly with data gathered from approximately 4,000 continuous traffic counting locations nationwide.  There is a link to their website at the end of this note if you would like to see the whole report and several charts summarizing the data attached to this note.

 

Because we are a skeptical bunch over here at Convergex, we cross-reference the miles driven data with information on gasoline usage from the U.S. Energy Information Agency.  This dataset comes from the private sector and is aggregated by the EIA. The correlation between the DOT’s miles driven and the EIA’s gas consumption is excellent: 70% since June 1974 and 77% since January 2007. The slippage is likely due to the structural improvements in fuel efficiency forced by Federal laws which mandate certain minimum average fuel economy standards for vehicle manufacturers.  Since 1973, for example, the average American car or gasoline-burning light truck has gone from 12.8 miles/gallon consumed to 22.3 miles/gallon. The largest gains, as the accompanying chart shows, occurred in the 1980s.

 

Declines in miles driven since 1970 are extremely rare, and the Great Recession was the longest period of such underperformance on record.  The 1973 oil shock produced 10 months of negative comps and the 1979 Iranian Revolution pushed comparisons lower for 17 months.  Both of those were, of course, periods when oil prices spiked.  Conversely, oil prices peaked in mid-2008 but we saw 29 consecutive months of declining year over year miles driven starting in May 2008 and another 9 months in 2011.

So what should we make of this sudden urge Americans seem to feel to hit the road?  Three points here:

Most Americans – some 85% – commute to work in their car and the majority (75%) does so alone. They are mostly on the road between 6:30am and 8:00am and then again from 4:00pm to 6:00pm. The fact that driving miles are increasing is therefore a sign that labor markets are truly picking up.  We’ve included a chart of the growth in miles driven versus the growth of the employed workforce and the long run correlation is 45% when you smooth out some of the data choppiness with a 6 month rolling average. 

 

Different parts of the economic cycle – contraction, bottom, expansion and peak – exhibit differing levels of correlation between miles driven and workforce expansion.  That makes sense – at a bottom there is little discretionary driving and the only uptake is incremental employment. Then, towards a top, people drive more to shop or take vacations. The gap between employment growth (2% year over year in the total employed population) and miles driven (3.9% rolling 6 month average of year-on-year growth) shows that we are likely more towards the top of a cycle. Put another way: people are driving more, but it’s not just because more workers have jobs. Rather, they are taking trips they might have put off during the last few years.

 

Cheaper energy prices must be playing a role here, but it is hard to quantify their exact contribution. The easiest comparison would be to the late 1990s, when oil prices went below $10/barrel and filling up the largest SUV only required a $20 bill. Miles driven rose by 2-3% a year from that point to 2001. We’re getting that kind of growth now, with $40/barrel oil and only moderate help from rising equity prices rather than dot-com mania.

To sum up, Americans are finally driving more. Some of that comes from a better labor market. An additional piece stems from discretionary travel. And a final component is due to lower fuel costs. All those factors point to a better economic backdrop for the second half of 2015.  If the U.S. can’t generate better labor market and economic growth with these tailwinds, what will it take?