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A new source of daily economic data shows that the 'demand' side of the economy has been shrinking at an annualized rate of over 1.5% during the trailing quarter. The new data, derived from millions of daily U.S. consumer internet transactions, recorded the trailing 91-days transitioning into net contraction on January 15th, 2010 after peaking at the end of August 2009. The contraction will flow down to the 'supply' side of the economy over the next few months, with the lagging GDP shrinking in the second quarter (see http://www.consumerindexes.com/GDPvsDGI.gif).

There are two separate stories in the above paragraph:

1) There is a revolutionary new daily source of spin-free hard data about the demand side of the economy. It does not involve any governmental sources. It does not utilize 'seasonal adjustments' (all numbers are year-over-year). It is simply based on real-time U.S. consumer transactions (see http://www.consumerindexes.com/Overview.pdf).

2) Current real-time consumer tracking data is showing contraction even as the latest GDP release indicates nearly 6% growth. The GDP lags by some 17 weeks both because it measures production activities 'downstream' from consumers and because the traditional data requires months to collect and adjust.

Some of this had been in the news recently, including coverage by Art Cashin, Bob Wenzel, Barry Ritholtz and Mike Shedlock (see http://www.consumerindexes.com/Shedlock.pdf).

However, the latest story is how the current contraction is unfolding. The two most recent prior contractions in 2006 and 2008 behaved very differently. The 2006 contraction was mild and was ignored by the equity markets. The 2008 contraction was neither. The 2010 contraction is tracking its own unique line on a day-by-day basis (see http://www.consumerindexes.com/ContractionWatch.gif).

We are not professional doom-sayers. We simply report what consumers have been doing on a day by day basis by mining on-line U.S. consumer tracking data for purchases of discretionary durable goods. We were incredibly upbeat one year ago -- when most economic indicators were preaching doom and gloom. Since August, however, consumers have been pulling in their spending, and our numbers have slowly turned upside down.

From our perspective on the demand side of the economy, a contraction is already here, having started officially in the middle of January. The only question now is whether the 2010 contraction will revisit 2006 or 2008? Our daily updates will ultimately tell the story.

If you would like to contact me for an interview, simply reply to this e-mail. If you are on a tight deadline, call me directly at the Consumer Metrics Institute: (303)656-9801.

The indexes themselves can be found at http://www.consumerindexes.com.
FAQS can be reviewed at the http://www.consumerindexes.com/faqs.html.
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Thank you,

Richard Davis
Consumer Metrics Institute, Inc.

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On July 30th the Bureau of Economic Analysis ('BEA') released its "advance" estimate of the annualized growth rate of the U.S. Gross Domestic Product ('GDP') during the 2nd quarter of 2010. Per their report, during the quarter the GDP grew at an annualized rate of 2.4%, down from 3.7% in the 1st quarter of 2010. Several points from the report merit comment:

► Readers familiar with GDP reports will be more surprised by the reported 1st quarter growth as by the new 2nd quarter number (which had been leaked by Mr. Bernanke last week), since only last month the Q1 of 2010 was supposedly growing at a 2.7% rate. Why did the Q1 number suddenly get altered upward by 1%? The BEA quietly revised the 1st quarter inventory adjustment up to a level that represents a 2.64% component within the revised 3.7% figure, with 1st quarter "real final sales of domestic product" now reported to be growing at a modestly improved 1.06% annualized clip, compared to the 0.9% number reported last month. In short, factories were piling on inventory at a substantially higher rate than previously thought, while the "real final sales" remained anemic.

► The 2.4% figure will garner all of the headlines, but the more important "real final sales of domestic product" continues to be weak, growing at a reported 1.3% annualized rate. The real cause for concern is that the reported inventory adjustments dropped from a 2.64% component in the revised 1st quarter to a 1.05% component during the 2nd quarter. If factories have begun to realize that end user demand remains anemic, the inventory adjustments could well go negative soon, pulling the reported total GDP down with it.

http://www.consumerindexes.com/commentary_2010_dailygrowthindexvsgdp.png

► The BEA revised much more than the first quarter of 2010. They revised down 2009, 2008 and 2007 as well. Apparently the "Great Recession" has been worse than our government has previously reported. And the recovery's brightest moment, Q4 2009, has been revised down from 5.6% to 5.0%. Similarly Q3 2009 dropped from 2.2% to 1.6%. And so on. The bottom of the recession was shifted back one quarter, with Q4 2008 now reported to have contracted at a -6.8% rate, revised down from the previously reported -5.4% rate. Most quarters of 2007, 2008 and 2009 have been revised down substantially, shifting the recession shown in the chart above back in time.

► The new GDP report shows that the current gap between the consumer demand that we measure and the BEA's reported number continues to grow as factories build their inventories in anticipation of a strong recovery. If factories curb their enthusiasm during the third quarter, the BEA's "advance" estimate for Q3 2010 might be brutal, just 4 days before the U.S. mid-term election.

► We understand that economists want to ultimately get the numbers right, even if it is three years after the fact. We applaud the BEA for their efforts. But we also understand people who are concerned about quiet governmental revisions to history.

Back to the real world: at the Consumer Metrics Institute our Daily Growth Index has dropped to new recent lows, and it is now contracting at a -3.4% rate.

http://www.consumerindexes.com/commentary_2010_dailygrowthindexlast60days.png

This contraction rate puts the trailing 'quarter' nearly into the 5th percentile among all quarters since 1947, meaning that only about 1 in 20 quarters officially recorded by the BEA since then has been worse. Our "Contraction Watch" places this movement into the perspective of the 2006 and 2008 contractions:

http://www.consumerindexes.com/commentary_2010_contraction_watch.png

The 2010 contraction is now clearly worse than the "Great Recession" was at the same point in their respective time lines. And we don't see a bottom forming yet.

At the Consumer Metrics Institute we measure day-by-day changes in the discretionary durable goods transactions of internet shopping consumers. We genuinely believe that the real economy lives where 'Main Street' consumers are (figuratively and/or literally) clicking 'Add to Shopping Cart', not where the GDP's factories slavishly follow the consumer's lead. The millions of consumers we measure each day respond collectively to what they see going on in their own local economy, with their own family and with their friends. And right now real-world 'Main Street' consumers are demonstrating substantial caution.

Our data is available at ConsumerIndexes (dot) com.

Thank you,

Rick Davis
Consumer Metrics Institute

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