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Lagging GDP Confirms Consumer Slowdown

Article from Consumer Metrics Institute (link:www.consumerindexes.com/index.html#30Apr2010):


On April 30th the Bureau of Economic Analysis ('BEA') of the U. S. Department of Commerce published their latest reading of the state of the production (or 'supply') side of the U. S. economy. Their measurement showed that first quarter 2010 factory activities were growing at a 3.2% annualized rate, equivalent to where our consumer 'demand' side 'Daily Growth Index' was on November 24th, 2009, roughly 18 weeks before the end of the time period covered by the BEA announcement.

Compared to the 4th quarter of 2009, the annualized growth rate of the GDP has dropped by 43%. Depending on your point of view this could be interpreted either as a glass that is 'half full' or a glass that is 'half empty':

1) The 'half full' reading would mean that the GDP numbers confirm that the recovery has at least moderated to a historically normal growth rate. The good news is that 'the economy is still growing,' albeit at a historically normal rate. The bad news is that a normal growth rate would only warrant normal P/E ratios in the equity markets.

2) The 'half empty' reading would be that the near halving of the GDP's growth rate confirms that (at the factory level) the economy has finally begun to 'roll over'. If so, the BEA's announcement portends even lower readings in the quarters to follow.

At the Consumer Metrics Institute our measurements of the web-based consumer 'demand' side economy support the 'half empty' reading of the new GDP data. We have often pointed out that our 'Daily Growth Index' had recently led the GDP by 17 weeks. The new GDP numbers (which are subject to at least two revisions) would indicate that the lead has actually increased to 18 weeks, stretching the lead time by about 6%.

A look at our 'Daily Growth Index' also shows that towards the end of November 2009 the 'demand' side economic activity was dropping so quickly that a two week change in the lead time would make a huge difference in the numbers being reported. At a lead time of 18 weeks the number is the 3.2% reported by the BEA. If the sampling period had shifted to two weeks earlier, the reported GDP number would have been 4.4%, substantially higher. However, if the sampling period had shifted to two weeks later, the GDP growth rate would have been only 2.0%, less than half the reading from only 4 weeks earlier. This is the sign of an economy in rapid transition.

The methodologies used by the BEA when measuring factory production are ill suited to capturing an economy in such rapid transition. In the 4th quarter of 2009 the production side of the economy was topping (reflecting the topping of our measurements on the the demand side in August 2009), causing some consistency in the BEA published readings of 5.7%, 5.9% and 5.6% for the quarter's annualized growth rate in its three consecutive measurement iterations over three consecutive months (all after the fact, by 30, 60 and 90 days respectively). The first quarter's production environment was at a much more dynamic spot in this particular economic cycle, and the subsequent monthly revisions by the BEA may be significant.

From our perspective the GDP is only confirming where our numbers were in November, which is, relatively speaking, ancient history. Since then we have seen our 'demand' side numbers slip into contraction (on January 15th), and they have recently lingered in the -1.5% 'growth' range (see charts below). We have long since recorded the 'demand' side activity that has been flowing downstream to the factories during the second quarter of 2010. If the GDP lags our 'Daily Growth Index' by 18 weeks again we should see the 2nd quarter 2010 GDP contracting at a 1.5% clip (since our 'Daily Growth Index' on February 24th was -1.46%).

I say 'should' because we have observed before that factories are loath to actually contract production until building inventories force them to curtail normal production schedules and furlough staff. We saw this happen during the 2006 'demand' side contraction event, when the GDP production side growth effectively dropped to zero but never went negative. The 2010 contraction however is showing enough persistence that inventories are likely to eventually build to the point where production curtailments should be made.

   
Daily Growth Index vs GDP
 
 
Consumer Metrics Institute Contraction Watch

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