Consumer Metrics Institute's Growth Index:
Seeing the Other Side of the Chasm?
By Doug Short
August 8, 2011
The Consumer Metrics Institute's Daily Growth Index set its historic low around Memorial Day. The index appears to be rebounding at an amazing pace and turned positive on August 3rd.
The Institute's August 5th special update, Daily Growth Index Breaks Positive offers some insight on what this trend reversal means.
It is very important to remember that our Daily Growth Index (and its precursor Weighted Composite Index) measure year-over-year changes in consumer demand for on-line discretionary durable goods. In other words, the indexes measure the slope of the demand curve, not the actual demand itself. When the indexes first cross into neutral territory (a reading of 0 for the Daily Growth Index and 100 for the Weighted Composite Index) it only means that the actual "absolute" on-line demand is no longer getting worse -- i.e., it has just reached rock bottom.
By analogy, our indexes measure the slope that a car is experiencing when driving on mountain roads in a fog. Our "car" started down a slope on January 15, 2010. It reached the greatest downward grade on the road over 16 months later in late May 2011. And on August 3, 2011 our "car" reached the bottom of the slope and the forward tilt leveled off. Furthermore, our moving-average mathematics lets us see a few yards ahead into the fog, and that view indicates that over the very short term we are likely to start climbing out of the deep canyon we have found ourselves in.
"Not getting worse" is good news. But it doesn't mean that we are anywhere near whole again (or that we have climbed anywhere near completely back out of the very deep valley we had driven into).
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.
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 initially 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. However, over the past several months the correlation has disappeared. One speculation is that the Federal Reserve intervention with the rumor and subsequent reality of QE2 has stimulated some components of the economy, but not the consumer.
Leading Indicator of the Market?
Has the Growth Index also served as a leading indicator of the stock market? It seemed to be during its first years of existence, but that has not been the case over the past year. 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. Since its peak, the Growth Index declined dramatically, entering contraction territory in mid-January of last year. The market showed signs of correcting in early 2010, which would approximate the lag for the earlier reversals. But that wasn't to be the case.
The CMI Growth Index contraction appeared to have bottomed in early October 2010 and started reversing, but 2011 has seen a renewed contraction. In contrast, the market continued its rally to late April 2010, corrected during the summer months, and then returned to the neck-snapping velocity of the spring 2009 rate of recovery.
Theoretically the notion that discretionary consumption leads the market seems reasonable. But the disconnect since early 2010 undercuts this assumption. On the other hand, we are living through some unusual economic times. As I mentioned earlier, the disconnect is to some extent a result of the Federal Reserve's quantitative easing (illustrated here).
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. Since we're now at day 501 in the current contraction, I'll either retire or redesign this chart in future updates.
The Curse of Seeing Ahead
Elsewhere in the August 5th special update, Rick Davis, the founder of the Institute, offers an interesting perspective on the CMI indicators as leading indicators.
Remember that real-world consumers transact with practically no attention to political drama or economic pundits. They do what is best for them, and they respond to their own personal circumstances. They are basically 100 million loose household cannons. Stay tuned, but the upturn we see has most likely resulted from a real bottom in housing demand (but sadly not tightening supply -- and not by a long shot) and the moderation of pain at the gas pump.
The curse of being way ahead of the dips in any economic cycle is that the people still on the down-slope think that you've completely lost your mind. Maybe we have. Just like we did in late November 2008 when we saw the on-line consumer demand bottom some 4 months before the early March 2009 market bottom.
But it sure is nice to finally be reporting (however delusionally) something other than unending gloom. We can at last see the glimmer of the other side of the chasm. Too bad that the rest of the world won't see it for some time.
Meanwhile, with Standard & Poor's downgrade of the U.S. and the probable market reaction, let's hope the chasm doesn't widen.