Sense on Cents

Economics is the most inexact of sciences. As much as we may think we can understand our future economic landscape based upon the study of the past, a variety of twists, turns, and unknown challenges inevitably come upon us. This reality has never been more prevalent than in our ‘Uncle Sam’ economy circa 2010. Do not think for a second that the ‘grand wizards’ in Washington currently undertaking the massive financial experiment throughout our economy do not appreciate this. They do. They just would not admit it.

Can we look toward private enterprises in an attempt to ‘see through’ the Washington smoke and mirrors? In fact we can. I make no bones about my admiration for the work of Rick Davis at Consumer Metrics Institute. As Rick so boldly states, the work at CMI is focused on:

“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.”

Well, what were our fellow Americans doing yesterday and the days before that?

To address that question, we will gain a real understanding as to why Ben Bernanke is so keen on implementing a second round of quantitative easing to support our lingering ‘walking pneumonia’ economy. Let’s navigate as Rick recently put forth:

October 10, 2010 – Daily Growth Index Sets Record Low and Duration Marks:

On October 4, 2010 our Daily Growth Index set a new all-time record low, reflecting year-over-year contraction rate of -6.13% — substantially surpassing the “Great Recession” low of -6.02% set on August 29-30, 2008:

To give this reading some perspective, a quarter of GDP growth this low should be expected in only 1.09% of all quarters since the spring of 1947, roughly once in every 23 years. But we think that 1st percentile performance is not the only story, as is evident from a look at our “Contraction Watch” chart. In that chart, the day-by-day course of the 2008 and 2010 contractions are plotted in a superimposed manner, with the plots aligned on the left margin at the first day during each event that our Daily Growth Index went negative. The plots then progress day-by-day to the right, tracing out the changes in the daily rate of contraction in consumer demand for two events:

As our regular readers know, we have been watching the 2010 contraction unfold since January in a manner quite unlike the 2008 event, with the most striking difference being a much more open shape in the current contraction — a contraction that seems reluctant to quickly recover towards growth. The most obvious sign that this contraction is lingering is the fact that it is still near record contraction levels after nearly 9 months, whereas the 2008 event had ended after only 7 months.

Our Daily Growth Index is a 91-day trailing “quarter” average of our Weighted Composite Index (converted from a nominal base 100 index into a +/- percentage growth number), and as such it is the quickest responding among our growth indices. Our 365-day Growth Index is designed to capture much longer term movements in the economy, and it now shows a -2.42% reading for the trailing year. This is nearly 25% worse than the previous low recorded in that index, a -1.94% reading recorded on December 1-4, 2008. Again, to place that reading in perspective, less than 1.7% of all 4 consecutive quarter “years” of GDP history since 1947 could be expected to be worse. A year that bad is entering the “once in a lifetime” realm.

We have also mentioned before our concern about the plateau seen in the blue line during its course down. The blue line lingered in the -1% to -2% zone for nearly four months, which may be the sign of a longer term “new norm” in consumer behavior. If that is true the 2010 event may not quickly recover, and could easily extend for more than another quarter — making this total contraction last for well over a year.

I first utilized the analogy of ‘walking pneumonia’ for our economy in my interview with Rick last March. I think this condition has been largely present for the last two years. The fact is, the ‘pneumonia’ is now deeply settling into our system.

Navigate accordingly.

Larry Doyle

Rick Davis and his colleagues at CMI are true visionaries. They are clearly way ahead of the curve in measuring the pulse of our economy. Rick’s work is one of the very few sites in the blogosphere that is worth paying to receive the Members Only premium.

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

This entry was posted on Thursday, October 14th, 2010 at 7:26 AM and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.