Tuesday, April 27, 2010

The Economy: "Walking Pneumonia Type of Contraction that has Legs"

I have previously written about the great work being done by Richard Davis of the Consumer Metrics Institute. He has emailed his latest thoughts on the economy:
Recent reports of a strengthening recovery are not fully supported by the
behavior of consumers on the web. At the Consumer Metrics Institute we
measure the depth and quality of web based consumer "demand" on a daily
basis, and during this recovery the year-over-year changes in "demand" that
we measure actually peaked in August 2009 and have been declining ever

In fact, our "trailing quarter" of web based consumer demand slipped into
year-over-year contraction on January 15th, and since then we have been
plotting the progress of this 2010 contraction event against the profiles of
similar events in 2006 and 2008

Click for chart.

As can see from the above chart the current consumer "demand"
contraction event is unique: if there is a "second dip" it may very well be
unlike anything we have seen recently. Instead of a "call-911" type of event
in 2008 or the "hiccup" witnessed in 2006, we may be seeing a "walking
pneumonia" type of contraction that has legs.

Over the most recent 7 quarters our economically "upstream" Daily Growth
Index has led the "downstream" factory GDP numbers by about 17 weeks. If
that pattern continues to hold, we are currently about halfway through the
consumer transactions that will drive the third quarter's production and
GDP. If the blue line shown in the above chart continues drifting laterally
over the next 40 days, the 3rd quarter 2010 GDP will look a lot like what we
have previously projected for the 2nd quarter 2010 GDP, contracting at a
mild but persistent rate.

In summary ... Even a recent upturn in our
retail index faded once the seasonal impact of the forward shifted Easter
holiday had passed. Furthermore, even during the Easter retail up-tick the
quality of the transactions was not very high. Big ticket items requiring
longer term financial commitments were relatively scarce, and for that
reason our Weighted Composite and Daily Growth Indexes did not materially

Our mission at the Consumer Metrics Institute is to measure (on a daily
basis) exactly how consumers are leading the U. S. economy. We "mine"
nation-wide internet consumer tracking databases on a daily basis for early
warnings about the demand side of the economy. Our data is significantly
upstream economically from the factories and the products measured in the
GDP, putting us far ahead of the traditional economic reports. Perhaps our
data is too timely; we are so far ahead of conventional economic measures
that our story generally differs (either positively or negatively) from the
stories being simultaneously reported by more traditional sources.
Davis' analysis is in sync with my views. Bernanke is simply not printing the money that would result in consumer buying, particularly durable goods orders, which is where Davis is picking up the most weakness. His data, I would argue, continues to support my view that the stock market remains extremely vulnerable. The data is indicative of a lack of funds flowing into the economy, which confirms the Fed data indicating that M2 money supply is not growing.This means the funds flowing into the stock market of are finite in nature, rather than funds coming fron on-going Fed printing. When the money runs out, so will be the stock market run.

It should also be noted that Davis is strictly tracking internet consumer transactions. It is not an indicator of the debt trouble developing in EU land or the debt trouble developing in a number of cities and states here in the United States.

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