Consumer Metrics Institute: Putting the Growth Index Into Larger Perspective

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Here's a new update on the Consumer Metrics Institute Composite and Growth Index charts I've followed over the past year.

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Background

Here is a link to the Institute's website. Its page of frequently asked questions is an excellent introduction to the service. See also the Institute's January 29 commentary, What the BEA's Advance Estimate of Fourth Quarter 2010 GDP Was Really Telling Us.

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 (NYSEARCA:SPY). 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. It remains 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.

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The next chart compares the contraction that began in 2008 with the one that began in January of this year. I've added annotations for the elapsed time and the relationship of the contractions to major market milestones.

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Does the CMI Growth Index Provide A Comprehensive Snapshot of the U.S. Consumer?

Last month Rick Davis, the founder of the Institute issued an important report on interpreting the index data: Reflecting Back on 2010 [Download PDF]. Davis essentially concludes that the index data is skewed toward a demographic of consumers who were more vulnerable to the economic downturn than the population as a whole.

By the third quarter we began to understand that the demographics of the consumers most likely to buy on-line were the same as those households most severely impacted by the recession. Unwittingly, some of the previously identified sampling biases in our data collection methodologies turned out to be much more significant than we might have suspected. Simply put, young and highly educated members of generations "X" and "Y" were particularly vulnerable to the hallmarks of this recession: entry level job losses and vanishing home equity.

I'll continue to report on the CMI metrics from time to time. It clearly offers important insight into the health of the consumer. But we can't take the numbers as an indicator of the consumer economy as a whole.