Consumer Metrics Institute: Contraction Continues to Slow
Courtesy of Doug Short
Note from dshort: The charts CMI charts are now updated through September 19th. The rebound in the Weighted Composite Index is encouraging, and the Daily Growth Index continues to show a reduced rate of contraction.
The latest commentary from the Consumer Metrics Institute has the intriguing title Has the Bottom Been Reached? Here are two excerpts from the commentary:
During the month and a half from August 1 to September 15, our Weighted Composite Index has improved substantially, rising from recording a year-over-year contraction rate in excess of 9% to recently registering a contraction rate near 3%. This is the largest positive movement that we have seen over half of a quarter since late 2009. The improvement has stopped (at least temporarily) the decline of our 91-day trailing quarter average (our Daily Growth Index)….
Over the past month and a half we have seen a substantial reduction in the year-over-year contraction of consumer demand. That said, it is important to remember that consumer demand is still contracting, albeit at a slower rate. We have previously used the analogy that our data is far "upstream" in the economy. We are sampling the behavior of internet shopping consumers on a daily basis. Those consumer activities flow "downstream" to factories over the course of weeks or quarters. It’s not unlike being upstream on a great river and watching a water-level gauge predict that downstream communities will be flooding catastrophically in a few days or weeks. Although our flood-gage may have just peaked, the downstream damage remains inevitable — it simply hasn’t arrived yet.
For the past several months, the Consumer Metrics Institute’s Daily Growth Index has been one of the most interesting data series I follow, and I recommend bookmarking the Institute’s website. Their page of frequently asked questions is an excellent introduction to the service.
The charts below focus on the ‘Trailing Quarter’ Growth Index, which is computed as a 91-day moving average for the year-over-year growth/contraction of the Weighted Composite Index, an index that tracks near real-time consumer behavior in a wide range of consumption categories. The Growth Index is a calculated metric that smooths the volatility and gives a better sense of expansions and contractions in consumption.
The 91-day period is useful for comparison with key quarterly metrics such as GDP. Since the consumer accounts for over two-thirds of the US economy, one would expect that a well-crafted index of consumer behavior would serve as a leading indicator. As the chart suggests, during the five-year history of the index, it has generally lived up to that expectation. Actually, the chart understates the degree to which the Growth Index leads GDP. Why? Because the advance estimates for GDP are released a month after the end of the quarter in question, so the Growth Index lead time has been substantial.
Has the Growth Index also served as a leading indicator of the stock market? The next chart is an overlay of the index and the S&P 500. The Growth Index clearly peaked before the market in 2007 and bottomed in late August of 2008, over six months before the market low in March 2009.
The most recent peak in the Growth Index was around the first of September, 2009, almost eight months before the interim high in the S&P 500 on April 23rd. Since its peak, the Growth Index has declined dramatically and is now deep into contraction territory.
It’s important to remember that the Growth Index is a moving average of year-over-year expansion/contraction whereas the market is a continuous record of value. Even so, the pattern is remarkable. The question is whether the latest dip in the Growth Index is signaling a substantial market decline like in 2008-2009 or a buying opportunity like in June 2006. I’ve also highlighted the recession that officially began in December 2007 and unofficially ended last summer. As a leading indicator for GDP, the Growth Index also offers an early warning for possible recessions.
Perhaps the most astonishing chart is the one below, which compares the contraction that began in 2008 with the one that began in January of this year. I’ve reproduced a chart on the Institute’s website and added annotations for the elapsed time and the relationship of the contractions to major market milestones.
Among other things, this chart illustrates the more subtle and pernicious nature of the current decline in consumption. The 2010 decline has exceeded the length of the complete 2008 contraction cycle — the combined contraction and recovery.
Fortunately, the current contraction appears to have bottomed and begun lessening. The key unknown is the extent to which this contraction will have a delayed impact on the metrics that determine GDP and GDP revisions over the next few quarters.
