CONSUMER METRICS: THE ECONOMY IS “SPUTTERING”
Courtesy of Consumer Metrics Institute:
On May 27th the BEA released its first revision to its 1st Quarter 2010 GDP growth rate measurement, lowering the number from a 3.2% annualized growth rate to 3.0% annualized growth. One day later the Consumer Metrics Institute’s ‘Daily Growth Index’ was signalling what we should expect the BEA’s measurement of the 3rd Quarter 2010 GDP growth rate to be: contracting at about a 2.0% rate.
The prior BEA estimate of 1st Quarter 2010 GDP growth trailed our ‘Daily Growth Index’ by 127 days, and because of the rapid rate that the economy was cooling when the measurements were being made, the newly adjusted estimate is now trailing our ‘Daily Growth Index’ by 125 days. The 3rd Quarter of 2010 ends 125 days after May 28th, when our ‘Daily Growth Index’ was recording a ‘growth’ rate of -1.99%. If the BEA estimates continue to trail our ‘Daily Growth Index’ in a consistent manner we should expect that the 3rd Quarter’s GDP ‘growth’ rate will be in the -2.0% neighborhood.
Several things were interesting about the BEA announcement, which seems to have been largely ignored by the equity markets on a day when the Dow Industrials were up over 280 points. Not only was the total growth rate revised downward by .2%, but the impact of inventory building was adjusted upward from 1.57% to 1.64%, meaning that the end growth rate of consumer demand (net of inventory build-ups) was dropped from about 1.63% to something closer to 1.36% — a 17% reduction that was hardly worthy of a 280 point rally in the markets. Perhaps the U.S. equity markets should obsess less about Greece and Spain and pay more attention to what is happening with consumers in their own domestic economy.
Since we first reported that our ‘trailing quarter’ had slipped into contraction on January 15th, we have charted how the current 2010 version of the consumer contraction event compares with prior similar events in 2006 and 2008. The current event is significantly different; while it is not as severe as the 2008 contraction, it has already lasted longer without forming a clearly defined bottom. We know that if the GDP mirrors consumer activities (as at least 70% of it should, net of inventory adjustments), both the 2nd and 3rd quarters of 2010 should be contracting at a level of between 1% and 2%. If this isn’t a classic ‘W’ shaped ‘double dip’, it is at least the downward glide of a plane with sputtering engines.
From our perspective the ‘economy’ lives where the consumer spends; everything else is merely the consequence of the downstream flow of commerce from the initial consumer ‘demand’. For this reason the official GDP measurements poorly reflect what is happening in the real-time economy, because they merely capture backward-looking factory production levels far downstream, as augmented by governmental redistribution of earlier tax
collections and new public debt. Even John Maynard Keynes would have had to admit that governmental stimulus has to ultimately cause increases in aggregate consumer demand for a real recovery to be happening. We simply aren’t seeing that yet.
The indexes themselves can be found at http://www.consumerindexes.com.
Thank you,
Richard Davis
Consumer Metrics Institute, Inc.
—- Waves hand slowly across your face —-
This is not the accurate forward looking indicator you are looking for.
— Waves hand slowly across your face —-
Please move along and continue watching CNBC. Yes, your Harley Davidson looks beautiful. What didn’t you chrome?
“Perhaps the U.S. equity markets should obsess less about Greece and Spain and pay more attention to what is happening with consumers in their own domestic economy.”
I agree, I however am of mixed opinion about the actual consumer being 70% of GDP:
” We know that if the GDP mirrors consumer activities (as at least 70% of it should, net of inventory adjustments)”
I have read a few things that call this number into question.
Anyone have any input on this figure?
Thanks
I have read multiple studies that peg the number closer to 60%. Here’s just one:
http://seekingalpha.com/article/207473-consumer-spending-is-not-70-of-the-economy
Geez, is there anything in finance you don’t know the answer to?
Thanks TPC, If you get a chance, would you opine on this cat’s post:
http://innovationandgrowth.wordpress.com/2010/05/01/giving-credit-where-credit-is-due-consumer-spending-is-not-70-of-the-economy/
He seems to make some valid points, for instance, the TV you bought actually sent Money to Asia.
Thus Spending is not necessarily tied to production.
I thought about this when Uncle Sam does the stimulus Check Thing..
Who exactly are we stimulating, Asia Via Walmart, or Boeing, US Steel, and Caterpillar?
From the linked article:
“There’s another point as well. Much of consumer spending is ‘induced’ by other changes in the economy–for example, a company gets a new order from overseas, and in response expands its factory and hires more workers. These newly-employed workers go out and spend which shows up as consumption. Should we say that this economic growth is being driven by PCE, or by exports?
Or the government steps up its spending on highways, which results in the hiring of more construction workers and more consumer spending. Should we say that consumer spending is driving the economy, or is it the increased government spending?”
And these new employees then take their paychecks and burn them rather than spending them? Why does time stop after the new job is created but before the new jobs are allowed to recycle their earnings into the local economy?
The author proves in his article that a large portion of consumption is spent on stuff which is *not* imported. This spending would create jobs in the same way that the foreign orders created the factory jobs described in the example.
In some sense this is a chicken and egg type scenario, but it should be obvious that increases in exports and/or consumer spending contribute to a virtous cycle wrt jobs growth.