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By Doug Short

The CMI charts have been updated through November 18. The Growth Index is now at -4.85. Thus far the 2010 contraction signaled by this index runs counter to the Census Bureau's Retail Trade and Food Services report. Of course, the scope of the Census Bureau's numbers is much broader than the CMI measure of discretionary activity. But it remains curious that some reflection of the CMI contraction isn't showing up in the government's sales figures.

I've been following the Consumer Metrics Institute's Daily Growth Index for the past several months. Here is a link to the Institute's website. Their page of frequently asked questions is an excellent introduction to the service. See also the Institute's November 9th commentary: Daily Growth Index Shows Signs of Bottom Forming.

The charts below focus on the '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.

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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.
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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 declined dramatically and remains deep in contraction territory although the contraction has become less severe.

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. I've also highlighted the recession that officially began in December 2007 and ended in June 2009. As a leading indicator for GDP, the Growth Index also offers an early warning for possible recessions.

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Perhaps the most astonishing chart is the one below, which compares the contraction that began in 2008 with the one that began in January of this year. I've reproduced a chart on the Institute's website and added annotations for the elapsed time and the relationship of the contractions to major market milestones.

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Among other things, this chart illustrates the more subtle and pernicious nature of the current decline in consumption. The 2010 decline had already exceeded the length of the complete 2008 contraction cycle — the combined contraction and recovery. Now it has exceeded the depth of the contraction as well.

The chart below is designed to show more clearly the latest movement of the Weighted Composite Index and the 91-day moving average Growth Index.

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Source: Consumer Metrics Institute: Has the Growth Index Also Served as a Leading Indicator of the Stock Market?