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Continuing Consumer Contraction Points to Accelerating Double Dip

Posted by Larry Doyle on July 27, 2010 6:10 AM |

2nd quarter earnings are certainly coming in stronger than expected, and our equity markets are having a solid rebound this month. Are these earnings reflective of real underlying strength in the economy or corporations that are now operating more efficiently?

Has our economy hit a soft patch? Is it declining? Are we rebounding from a recent downturn? Might we experience a real double dip?

The initial reading of 2nd quarter GDP is due this Friday. To say that it is highly anticipated would be a huge understatement. Consensus expectations for 2nd quarter GDP are running between +2.5% and +3%. Recall that the final 1st quarter report registered a +2.7% reading.

A Sense on Cents favorite has a decidedly different view of 2nd quarter economic activity and the subsequent GDP.

Rick Davis of Consumer Metrics Institute has not been bashful in projecting 2nd quarter GDP of -1.5% (with 3rd quarter GDP of -2%) based on his real-time analysis of discretionary consumer internet related purchases. This disparity of a full 4% between Rick’s 2nd quarter outlook and most economists is enormous. That said, Rick’s work has been remarkably accurate and consistent in projecting GDP a full 17-18 weeks prior to its release. What does Rick’s work show lately?

Are you sitting down? The picture is not pretty. The double dip and accompanying economic decline are getting steeper. Let’s navigate.

July 26, 2010 – Daily Growth Index Surpasses 3% Contraction Rate:

Since last week our Daily Growth Index has weakened further, surpassing a year-over-year contraction rate of 3%. This daily measurement of on-line consumer demand for discretionary durable goods has now dropped to the lowest level it has recorded since late November 2008:
Our Daily Growth Index reflects the strength of consumer demand over the trailing 91-day ‘quarter’, weighted according to the contribution that goods involved in on-line transactions make to the GDP (per the BEA’s NIPA tables). It is designed to serve as a proxy for a ‘real-time’ GDP, and it slipped into net contraction on January 15th, 2010. To put this decline in perspective we offer the following observations:

► The current contraction in consumer demand for discretionary durable goods has now extended for more than 6 months.

► The day to day level of the year-over-year contraction is now worse than a similar reading of the ‘Great Recession’ of 2008 was after 6 months.
► The amount of damage done to an economy by an economic slowdown can by quantified by multiplying the event’s average rate of contraction times the duration of the event. By that measure the 2010 contraction has now inflicted 43% as much pain on the economy during its first 6 months as the ‘Great Recession’ did during the first 6 months of that slowdown.

► Although this contraction has not yet reached the extreme contraction rates that were seen during 2008, after 6 months it has not yet formed a bottom. Furthermore, it is now likely to last longer than the 2008 event.

► In an even broader perspective, the current level of the Daily Growth Index over the trailing 91-day ‘quarter’ would put it among the lowest 6% of all calendar quarters of GDP growth since 1947. Only roughly 1 in 17 quarters of GDP activity have been worse.

► The duration of the current contraction event is becoming a real problem. Our trailing 183-day ‘two consecutive quarters’ growth index has dropped into the 5th percentile among similar two consecutive quarters of GDP ‘growth’ since 1947. This means that the trailing 6 months have been statistically worse than the trailing 3 months — less than one in twenty 6-month spans have been worse since the BEA began keeping quarterly records.

Rick’s work and his methodology do not waver. There is no fudging. There are no smoke and mirrors. There are no seasonal adjustments.

Who knows what the BEA might report on Friday and who knows how the market will react? Until proven wrong over a protracted period — and Rick has a fabulous 4-year track record — Sense on Cents is staying on the Consumer Metrics Institute horse.

Navigate accordingly.


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