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

What 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. The authors 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, the authors show that seasonally-adjusted VMT growth is closely related to employment growth and real Gross Domestic Output (GDP) growth. Second, this relation strengthens as the authors 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, their index of VMT growth has incremental predictive content for the revisions in the initial estimates of employment growth and real GDP growth. Fourth, their 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. The authors 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, the authors 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, their 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.