– What Is Power Consumption Telling Us About The US Economy? (Erico Tavares Of Sinclair & Co., July 13, 2014):
We track US power consumption on a weekly basis as reported by Barron’s, as we believe this information provides insightful – albeit sometimes “noisy” and seasonally unadjusted – clues about the performance of the economy over time.
The expectation is that a more robust economic environment requires more power, although factors like colder winters and warmer summers relative to the norm can greatly skew the analysis. With that in mind, let’s have a look at the weekly historical performance of this indicator going back to 1995 (in MM kWhs):
Many peaks and bottoms can be observed as power demand changes seasonally over the year. We have used polynomial smoothing to extract a trend line (in black).
Some quick observations:
- US power consumption peaked in 2006 (red line), approximately in line with the peak in the US housing market, and the trend line has flatlined since.
- By definition a peak in consumption means that any new capacity additions, for instance to accommodate incremental renewable energy production, will need to be made at the expense of existing production capacity, which in turn will affect plant efficiencies and so forth. That being said, there is a considerable amount of coal-fired capacity, possibly even nuclear, that will be coming off-line in the coming years mainly due to environmental regulations, so it will be interesting to see how all of this will play out in the US power markets.
- The last intra-cycle power consumption peak was recorded in 2011, broadly in line with the recent global peak in commodity prices. While most commodity price analysis commentary focuses on China as the “marginal” buyer, it seems the US still plays an important role not only as a supplier but also as a consumer.
Consumption peaks normally come in late July/early August, so it is still a bit early to gauge how 2014 is shaping up. However, in the grand scheme of things and despite the limitations of this indicator, historical kilowatt consumption suggests that the US economy at best continues to muddle along, despite an unprecedented amount of policy stimulus – some of which may even be curtailed before the end of the year.