How low can we fall this fall? (Automatic Earth)
August 23 2010:
"Laundry day in the Quarter, New Orleans, 1133-1135 Chartres Street"
Ilargi: Just after I wrote a few days ago on the Consumer Metrics Institute's latest batch of graphs and data, I saw that Doug Short had had the same idea, and even added a number of his own great graphs using the CMI data. I decided to do a follow-up on the topic, because this may well be the most important set of economic indicators we have available to us when it comes to what's going to happen between now and 2011, as well as beyond. (Do note, once again, that CMI bases its data exclusively on the 70% of US GDP driven by consumers.)
Allow me to start off with what Doug Short has to show and tell. That is, after this little detail, which Short has had no time to incorporate yet either: The CMI Current Growth Index Values table indicates a further deterioration in the 91-day Trailing Index from last Friday's -5.06%. Today it stands at -5.25%:
Take it away, Doug:
The charts below focus on the [Consumer Metrics Institute] 'Trailing Quarter' Growth Index, which is computed as a 91-day moving average for the year-over-year growth/contraction of the Weighted Composite Index, an index that tracks near real-time consumer behavior in a wide range of consumption categories. The Growth Index is a calculated metric that smooths the volatility and gives a better sense of expansions and contractions in consumption.
The 91-day period is useful for comparison with key quarterly metrics such as GDP. Since the consumer accounts for over two-thirds of the US economy, one would expect that a well-crafted index of consumer behavior would serve as a leading indicator. As the chart suggests, during the five-year history of the index, it has generally lived up to that expectation. Actually, the chart understates the degree to which the Growth Index leads GDP. Why? Because the advance estimates for GDP are released a month after the end of the quarter in question, so the Growth Index lead time has been substantial.
Has the Growth Index also served as a leading indicator of the stock market? The next chart is an overlay of the index and the S&P 500. The Growth Index clearly peaked before the market in 2007 and bottomed in late August of 2008, over six months before the market low in March 2009.
The most recent peak in the Growth Index was around the first of September, 2009, almost eight months before the interim high in the S&P 500 on April 23rd. Since its peak, the Growth Index has declined dramatically and is now deep into contraction territory.
It's important to remember that the Growth Index is a moving average of year-over-year expansion/contraction whereas the market is a continuous record of value. Even so, the pattern is remarkable. The question is whether the latest dip in the Growth Index is signaling a substantial market decline like in 2008-2009 or a buying opportunity like in June 2006.
The next chart is a three-way overlay — the 91-day Growth Index, GDP and the S&P 500. I've also highlighted the recession that officially began in December 2007 and unofficially ended last summer. As a leading indicator for GDP, the Growth Index also offers an early warning for possible recessions.
Preliminary Conclusion
The Consumer Metrics Institute's Growth Index hasn't been in operation very long, but thus far it has been an effective leading indicator of GDP. As such, the prospect of a double-dip recession, something that's happened only once since the Great Depression, remains a possibility.
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