The latest Vehicle Miles Travelled (VMT) figure published by the Federal Highway Administration (FHWA) places January’s VMT at 222.8 billion miles, 1.6% below 2009 and 2.5% below the 2004-08 timestep. This is troubling when compared to values just a few months ago.
For instance, VMT in November was 1.4% higher year-on-year, while December was 1.2% higher. Much like jobless claims, consumer confidence and other key macro indicators, VMT appears to be weakening through this “recovery.”
What’s worse is that January was milder in terms of winter weather compared to December, which saw crippling snowstorms hit the East Coast. If consumers were already scaling back driving (and thus gasoline spending) in January, what did they do when February’s snowstorms hit?
January’s figure was especially unnerving considering that the VMT has a strong historical relationship with total mogas inventories. During 2009, the correlation coefficient was a strong negative (0.709) — large drawdowns in inventories meant strong VMT figures. Thus, when inventories grew by a seasonally small 4.2% in January 2010 (the historical average is 5.4%) analysts assumed VMT would be strong.
What explains the small growth in inventories? The fallacy of relative values, i.e., percentages.
Analysts assumed 4.2% growth was better than expected, but in absolute terms gasoline stocks in December were 5.3% higher than 2008. Thus, a 4.2% increase was a still large 9.2 MMbbl build.
An even more bearish picture plays out for February, which saw mogas inventories decrease by just 2.5%, whereas the historical average is 3.0% or 6.9 MMbbls. Put simply, we had more barrels in tank and used less of them.
On a more positive note, VMT may be stronger due to a drop in prices at the pump. We last saw prices drop in December, from $2.70 to $2.66, and consumers reacted strongly, pushing VMT 2.1% above The Schork Report’s estimates. Prices between January and February dropped from $2.76 to $2.70 so the bulls may yet have hope.
As far as our regression goes, taking in to account February’s mogas inventories and retail prices we would expect VMT to decline by 1.6% to 219.17 billion miles. This is better than the 3.1% decline seen last year, but is dependent on consumers responding to a six cent drop in prices in a similar fashion to the four cent drop seen in December.
Subjectively, we would allow for slippage towards a slightly larger drop given the extreme weather conditions. But a drop much below 218.50 billion miles would be a very bearish picture.
The bottom line, February VMT figure will be a key indicator for the strength of the economy. Jobless claims have stagnated; consumer confidence is wavering; if February sees a strong VMT figure, it could herald a turnaround. Otherwise, the bulls will have a very hard time justifying $85, and $3.00 at the pump.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.