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How Can Rick Davis Project 2nd Qtr GDP at -1.5%? This is a MUST Read, Listen, Learn!!

Posted by Larry Doyle on March 29, 2010 7:17 AM |

If the American consumer represents 70% of our economy, shouldn’t economists study consumer spending as much as possible? Well, one individual, and he is not a trained economist,–he is actually a physicist by trade– has done and is doing just that. Who is this visionary? Richard C. Davis of the Consumer Metrics Institute.

I hosted Richard on my radio show, No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Rick Davis, last evening. If you have any interest in the economy (and if the economy is even peripherally linked to the markets), you MUST listen to this interview. Those who follow my work know I am not one taken to hyperbole, but last evening’s show was as good as it gets in terms of cutting edge analysis on the economy focused specifically on the consumer.

What does Richard Davis and the Consumer Metrics Institute do that is so special? The institute promotes itself as:

“Bringing the measurements of critical economic activities into the twenty-first century by mining tracking data for an understanding of what American consumers were doing yesterday.”

How does the Consumer Metrics Institute analyze consumer spending literally yesterday and the day before that? They focus on internet-related purchases of discretionary, durable goods across ten major segments of our economy. Yes, folks, this data is the ultimate ‘canary in the coal mine.’ (STICK with ME….!!)

While the entire interview is a must listen, the 6-minute ‘knock your socks off’ clip starting at the 44:00 minute mark is mandatory (an audio player is provided below). Please allow me to provide my own edited version of this segment, in which I am discussing with Richard how government analysts and economic academicians have problems in sourcing and studying data to project GDP.

RD: There’s a problem with the lag in getting the info. The second problem they have, they’re looking at production (LD’s edit: as opposed to the CMI’s focus on real-time consumption) which is way downstream. We think what’s happening in the economy isn’t necessarily what’s happening at factories.

LD: So, you’re way upstream with the consumer?

RD: We’re way upstream with the consumer. It’s going to take some time for the impact of the consumer to flow downstream to production.

LD: In layman’s terms, what you just told me is you’re ahead of the curve or you’re ahead of the academicians or the government analysts in measuring GDP.

RD: Yes. Just by virtue of where we’re sampling. We’re sampling upstream and we’re getting daily data. It takes us two days to authenticate and validate, not a month, and we’re measuring on a daily basis.

LD: Could I be so abrupt and ask you what 1st quarter GDP is going to be?

RD: 1st quarter GDP, we would guess, is going to be about 2.5%. The reason I say that is that’s where our numbers were 17 weeks earlier. What we notice is that our Daily Growth Index, as we call it, leads the GDP at least over the last 6 quarters by about 17 weeks.

LD: Wow!! That right there is an unbelievable statistic. I mean 17 weeks, heck, that’s more than a quarter itself.

RD: Yes, yes it is. In fact, the 1st quarter GDP will approximate where our numbers were at the end of November.

LD: So if that is the case, instead of 1st quarter GDP, could I be so bold as to ask what you think 2nd quarter GDP is going to be?

RD: Oh you may, you may! We would guess that the 2nd quarter is going to end up in contraction by about 1.5%. (LD’s edit: That’s -1.5% 2nd quarter GDP, boys and girls!!)

LD: Really!!??

RD: That’s where consumers are at right now.

LD: You’re saying again, I just want to go over that, you’ve got 2nd quarter GDP contracting by 1-1.5%. You think that’s just a function of the wearing off of stimulus? Wow!! That’s a big number. You’re not going to make a lot of friends in Washington with that call.

RD: We don’t get invited to the Washington parties!

LD: You’re invited back to No Quarter Radio’s Sense on Cents with LD whenever you want.

RD: The reality is, as we look at the data there were two bursts of consumer activity that occurred to trigger the recovery, although this is a jobless recovery which, in my mind, most consumers and most citizens would consider a jobless recovery an oxymoron. There is no such thing. Given that we have this thing that the Fed is convinced is a recovery, it’s all the spin. We saw consumers do two things. We saw consumers spend more in Christmas 2008 relative to a year earlier, although it was barely noticed, and they spent again starting in March 2009, but that peaked in August. Since then it’s been basically downhill.

LD: Wow. That’s amazing insight.

No spin, no nonsense, no posturing, no pandering. Just straight and direct review and analysis of real time ‘canary in the coal mine’ consumer data. Do a friend a favor and share this with them. Do yourself a favor and find an hour to listen to the entire interview. I guarantee that you will learn a wealth of information and be better prepared to navigate the economic landscape.

LD

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  • Mark G.

    Latest data from AAR:Compared with the same week in 2009, container volume increased 12.3 percent and trailer volume dipped 3.2 percent. Compared with the same week in 2008, container volume was up 3.6 percent while trailer volume fell 33.1 percent.”

    This data seems to confirm your guest’s statements. A spike in
    containers and a dip in trailers. More restocking via imports, but less demand from retailers.

  • kd

    Can you provide any back testing to their results? Meaning, has their methodology accurately predicted GDP over time?

    • LD

      KD,

      Great question!!

      Going to the source. I will tell you that Richard Davis did indicate that his data is very highly correlated with actual Sales Tax Revenue collected by the states. Those revenues are declining. What is the key here?

      The government’s collection of retail data and consumer spending has a heavy “Survivor Bias” built into it. What is that? Same store sales and overall sales data is only collected from stores still in existence. This bias overstates sales during recessionary or down economic periods (when stores shut down) and similarly understates sales during good times when stores may be opening.

      Will be back on the other question.

    • KD:

      Thank you for your question! I’m not an economist, nor am I a statistician, so any help anyone can provide with back testing correlations would be greatly appreciated.

      I have created a spreadsheet with the data used in the left hand chart on the home page at http://www.consumerindexes.com. That data can be downloaded from this link: http://www.consumerindexes.com/CMI_Backtest_Data.xls

      How I got my “17 week” lead time number was much less rigorous. I got a visual sense of the correlation from the graph, and then worked backwards to the point that our data value corresponded to the quarterly GDP annualized change figure. Over several recent quarters that turned out to be about 17 weeks, which seemed to agree with the graph.
      In the spreadsheet I’ve provided I show a month end date, the GDP figure for the quarter including that month, the monthly average value of our Daily Growth Index for the month, and the month end value for the Daily Growth Index. Please let me know if your back testing can improve on my crude correlation.

      Incidentally, the full daily set of data back to 2005 is available to members of the Consumer Metrics Institute. Our Daily Growth Index (or more accurately our 91-Day Growth Index) is a simple moving average of our Weighted Composite Index over the sliding and trailing 91-Day ‘quarter’, where the Weighted Composite Index is converted from a base-100 index to a +/- percentage.

      Thanks again for listening to Larry’s show.

      Rick Davis
      Consumer Metrics Institute

  • LD

    Rick,

    Thanks for your response. Under the heading of “a picture paints a thousand words,” here is a graph of your 91 Day Growth Index and the GDP. Seems very highly correlated to me. Sorry the graph goes off the page. Readers, please click on this link for a better view.

    91-Day Growth Index

  • MO

    Dear Larry,
    I found last evenings guest (Rick Davis) and topic to be amazing. Even I, without extreme knowledge and skills (just a delightful interest) in the economy know that something is wrong. Walking pneumonia is going to be a delight compared to the triple earth-quaking tsunami that seems to be approaching. Maybe things will eventually get back on track -if we will start teaching advanced ethics in pre-school perhaps.

    Your guest helped to show that my thoughts are not based on “dooms day” thinking or “sour grapes” logic.

    Keep up the awakening.

    • chuck walla

      Don’t forget teaching the Constitution, freedom,
      American Heritage and economics. Oh, and a good look at
      Russian, Chinese and Cuban history.

  • Paul Maulden

    Mr Davis,
    Your work is impressive, and the insights useful, but in the case of Q1 Q2 I believe what you have made evident is the severity of the winter, not large consumer declines.
    Home mortgages drop off a cliff on Dec 18 – the first day of the big blizzard, and east coast storms last for two months. Maybe even push some purchases into Q2.
    Keep up the good work.

    • LD

      Paul,

      Thanks for your comment but I am going to guess you did not listen to the full interview. Why?

      Richard Davis addressed the fact that his model is all driven by internet related retail activities and thus to a large extent takes winter out of it. In fact, in my opinion, one might assert, Mr. Davis’ work and numbers might be positively impacted by bad weather as people shop from home.

      In any event, I hope you can find time to listen to the entire interview. I believe you will find it most interesting and informative.

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