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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:
Chart
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.
Chart
► 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.

LD

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  • Lou

    This disparity between Mr. Davis’ work and our resident expert economists sets up for a dramatic swing and a miss on somebody’s part. Should be very interesting. Will we get a positive print but THEN big revisions with the updates to lessen the blow?

  • BMB

    Interesting stuff. That said, we’re talking about a gov’t number here — GDP. I have a hard time believing we’ll see a negative GDP number — true or not — until it absolutely cannot be manipulated any further. And then they’ll change the methodology… TPTB are not going down without a fight. A huge fight.

  • Dave

    How will they explain away the stats and data captured by Mr. Davis?? What a great find. Fascinating stuff.

  • Alex

    I’m going to predict that on Friday Davis will be proven wrong. He’s not only going against the grain he’s diametrically opposed to many economists with equally steller records, some over much longer periods than 4 years.

    Larry, you’re a stand up guy. The big frustration with the financial media is that “experts” made bizarre, usually bearish predictions, and then when they don’t come to fruition there is no accountability. If Davis’s prediction does not come true I hope you don’t ignore the erroneous prediction like every other site would.
    Yes, this type of prediction provides comfort for those who are out of the market, and missed the 60% run up. But like most off-the-wall calls look for it to miss, and probably miss badly.

  • LD

    Alex,

    The question that needs to be asked is: What is the final GDP report relative to Rick’s projection? Recall that 1st qtr GDP was revised lower by .5% from an initial 3.2 to a final 2.7%.

    Check out the correlation of the graphs from CMI with the BEA’s GDP report. Remarkably well correlated. It’s all going to change now? Again, we will see. But I do not think Rick is about to change his process.

    Rest assured I would NEVER duck and weave. If I’m wrong or think somebody I believe in is wrong, I will not be bashful in stating it.

    Rick’s work, though, is not about the market. You strike me as reasonable in your thoughts, but aggressive in thinking Rick is outlandish or off the wall. The fact is he is amazingly consistent and simple in his work and output.

    Thanks for your thoughts. We will definitely have more to discuss.

    • Alex

      I realize his work has nothing to do with the market per se, but of course growth forecasts and growth stats influence the market. When the numbers come out Friday the market will jump high or fall low depending on those numbers.

      I guess I adhere to what Warren Buffett said recently. This is a paraphrase, but it was something like, “I think we’re forgetting that we’ve always had problems, big ones, in this country. Remember the energy crisis? Remember Vietnam? Yet the economy will endure, and grow, over time. Double dips and depressions are extremely rare, and it’s very unlikely we’re heading for either.”

      Like I said, that’s a loose paraphrase, but I think the message is consistent. But then again, maybe Mr. Buffett is unfamiliar with Davis’s work.

  • Alex

    And, yes, Buffett was not commenting directly on growth. Bottom line: I’m venting about the extreme pessimism in the financial blogosphere over the past 18 months. Extreme pessimism on growth, about the market, on Europe. Not your site specifically, as I haven’t been reading for that long. I’m talking in general. If I had listened to the financial blogs 18 months ago I would have sold every investment. Fortunately, instead I bought and I’m up 70 percent.

    • LD

      Alex,

      I think you have to admit that the economy vs the market are truly two different points of debate. Those who would impute that the markets are truly, directly correlated with the economy are reaching, in my opinion.

      The fact is the markets are now very short term oriented. I am trying to write and focus on longer range targets.

      I agree that the markets and economy are connected. I just do not think they are currently highly correlated.

  • BMB

    That was kind of my point in my earlier comment. I have no quarrel with Davis’ figures or analysis whatsoever. What I doubt is that our gov’t would admit to a negative GDP at this point in time. It’s just a statement of what little trust I place in any gov’t figures, rather than an argument with the data presented here.

    The gov’t simply has too much at stake to admit real truths when it comes to GDP, employment, inflation, etc. The game MUST go on.

  • Alex

    It’s Friday and the report is 2.4% growth. Mr. Davis was dead wrong. Hedge all you want (the game is rigged, it may be adjusted down .5%, the dog ate his homework, etc.) the fact is as I said earlier this week – these out of left field, the sky is falling economic calls have to stop at some point in this country.

    Even if the government ratchets this down .5%, leaving us with growth of about 2%, Davis was still far, far off. Larry, I enjoy your site, please find another growth “expert.”

    • LD

      Alex,

      I personally believe you and Rick are looking at different sides of the same coin.

      What about all of the revisions? How is it that a 1st qtr report of 2.7% can move a full 1% in the course of one month? Listen the markets can and will do whatever they want. The markets strike me as not totally disconnected but certainly somewhat disconnected to the underlying economy for a long time.

      I always respect the markets because despite what some may think, ‘the market is the market’. That said, Rick’s work is proven and he has 4 plus years worth of data with a high correlation.

      Is Mr. Davis truly dead wrong? Or are the statistics merely being massively manipulated? Hmmmm…..The fact is markets will trade off govrenment reports so we need to pay attention to them. We do not necessarily need to agree with them but that’s anpother matter for another day.

  • Alex

    Davis whiffed big. Stop making conspiratorial excuses. You’re starting to sound like Art Bell.

    If Davis was off by a percent or less your point would be well taken. But he was off by 4 percent, a ridiculous number.

    Davis needs to eat some humble pie. He’s like a weathercaster who predicted a hurricane and the day turned out to be clear.






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