Diesel-Fuel Gauge Shows Economic Hurdles

Bloomberg News

An index that uses diesel-fuel consumption as a proxy for economic activity has a good track record of signaling economic turning points.

.Take the little-known Ceridian-UCLA Pulse of Commerce Index, out Tuesday, which uses diesel-fuel consumption as a proxy for economic activity. The seasonally adjusted index will show a small uptick in November following three straight monthly declines. Unfortunately, the 0.4% gain isn't enough to reverse the prior month's decline—or to break its downward momentum.

The three-month rolling average of the index has declined for three of the past four months, breaking a run of 13 prior gains dating back to the recession's official end in June 2009. That points to annualized gross-domestic-product growth of "2% or under" in the current fourth quarter, says PCI chief economist and UCLA professor Ed Leamer.

That is a pretty contrarian view. Many economists have been raising their U.S. growth forecasts following a raft of better-than-expected economic reports, plus the Federal Reserve's ultra-loose monetary policy. Goldman Sachs now expects GDP will grow at a 2.7% pace in the fourth quarter and 3.6% next year. Similarly, Barclays Capital strategists recommend investors move from a defensive to a more aggressive stock-based portfolio heading into 2011.

But investors shouldn't tune out the creaking wheels of commerce. The PCI, over its 11-year history, has a decent record of nailing economic turning points. It peaked in January 2008, just one month after the recession officially began, then hit bottom the same month the recession ended last June. Most recently, it has been trending down since topping out back in May.

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.Mr. Leamer chalks it up to the double whammy of a fading inventory boom plus weakness in construction and manufacturing. Recent data from the Institute for Supply Management support this view: the manufacturing production index fell nearly eight points last month, while the inventory index hit a 25-year high. Last Friday's jobs report, meanwhile, showed both industries shed workers in November as the U.S. unemployment rate rose to 9.8%.

That doesn't mean a double-dip recession is around the corner. It does cast doubt on the potential for lowering the unemployment rate, though—and suggests the U.S. economy isn't carrying quite as much momentum into next year as Wall Street seems to expect.

Write to Kelly Evans at kelly.evans@wsj.com