Traffic Volume and Aggregate Economic Activity: Implications for Taking the Pulse of the U.S. Economy

016587362016Final Report 2/1/2015 - 9/30/2016PDFTech ReportCA16-2854;UCTC-FR-2016-0465A0528Economic analysisEmploymentGross domestic productMacroeconomicsMathematical modelsTime seriesTraffic dataTraffic volumeVehicle miles of travelGross Domestic Output (GDP)Economic activityUnited StatesCaliforniaCalifornia. Dept. of TransportationPatatoukas, Panos N.Skabardonis, AlexanderUniversity of California, Berkeley. Institute of Transportation StudiesCalifornia. Dept. of TransportationUS Transportation CollectionWhat is the incremental relevance of real-time traffic volume data for taking the pulse of the U.S. economy? Although prior research has identified a positive link between traffic volume and economic activity, there is a dearth of evidence on the relevance of traffic volume information for taking the pulse of the U.S. economy. Our study uses data from the Traffic Volume Trends (TVT) reports of the Federal Highway Administration of the U.S. Department of Transportation, to construct a real-time index of Vehicle Miles Traveled (VMT) growth and deliver four main messages. First, we show that seasonally-adjusted VMT growth is closely related to employment growth and real Gross Domestic Output (GDP) growth. Second, this relation strengthens as we move from the initial estimates of economic activity to more recent vintages, which are closer to the true state of the U.S. economy. Third, our index of VMT growth has incremental predictive content for the revisions in the initial estimates of employment growth and real GDP growth. Fourth, our analysis of the granular origins of aggregate VMT fluctuations shows that the index of aggregate VMT growth can be constructed in a cost-effective way by focusing on a subset of key states. Our analysis of the granular origins of aggregate VMT fluctuations also highlights the importance of state of California for gauging fluctuations at the federal level. Indeed, we find that on a stand-alone basis California VMT growth explains as much as 64% of the time-series variability of aggregate VMT growth. Overall, our findings have important implications for a wide array of decision makers, including the Federal Reserve when formulating monetary policy and capital markets participants when making investment decisions, and can lead to significant improvements in the measurement of economic activity in real-time