Ghosts of Stimuli Past – Guest Post

I am always pleased to be able to share the fine work done by Rick Davis over at the Consumer Metrics Institute.

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At the Consumer Metrics Institute we have been monitoring the impact of last year’s consumer oriented Federal stimuli on both the past spring’s “green shoots” and our year-over-year measurements of consumer demand. Typical of the kinds of stimuli we saw was the “cash for clunkers” promotion, which created the glaringly obvious upward demand blip that could be still seen in our Domestic Autos Sub-Index a few months back:

2010 06 01 domestic autos Ghosts of Stimuli Past   Guest Post

Also obvious in our data is the impact of the Federal Housing Tax Credit, which (although extended several times in several different forms) was originally intended to expire in November, 2009. Again this can be clearly seen in a chart from a few months back:

2010 06 01 weekly home loans Ghosts of Stimuli Past   Guest Post

The above chart indicates that potential home buyers with both the opportunity and means to take advantage of the tax credit did most of their leg work before the expiration of the original purchasing deadline. Our data also seems to tell us that the subsequent extensions did not draw substantial numbers of additional buyers to the party, although the extensions may have delayed transactions or accommodated closings that would not have been sufficiently timely. It is important to remember that our internet based measures of consumer demand don’t directly capture closings, but instead see leading activities further “up stream”, such as loan applications, insurance applications and home inspection engagements.

No two sectors of the economy impact the GDP more than housing and autos. The above charts explain three things:

  • The “green shoots” of recovery that were widely reported in the press in late 2009 and early 2010.
  • Our year-over-year growth numbers plummeting now, a year later.
  • What consumers have done since the stimuli expired.

As a result of last year’s artificially stimulated “green shoots”, our current year-over-year measurements of consumer demand suffer significantly by comparison. Our Daily Growth Index continues to decline, and we expect the year-over-year data to continue to suffer during August because of the now lapsed year-ago stimulus packages:

[Read more...]




Consumer Spending Monitor – 58 Percent Rate U.S. Economy as Poor

In the just released Discover Spending Monitor report for July the index has fallen to 86.5 from 88.4 in June.

Overall, 58 percent rate the U.S. economy as poor, a 7-point increase from June, and only 23 percent see economic conditions improving in the month ahead, the lowest this number has been in a year.
I’ll have more once I obtain the full report.



Behind the Credit Numbers by Rick Davis

Once again I am pleased that Rick Davis from the Consumer Metrics Institute is allowing me to present his latest work for the RebelTraders audience.

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During the past week there has been a flurry of Federal Reserve reports and commentary concerning the levels of credit in the current economy. The two most notable were:

On July 8th they reported that the level of seasonally adjusted outstanding U.S. Consumer Credit (their G.19 report) decreased during May by $9.1 billion, representing an annualized rate of credit contraction of 4.5%. Although even this change is above the average for the preceding twelve months, it is much smaller than a quiet revision to the previously published April U.S. Consumer Credit figure — which is now reported to have decreased by $14.9 billion (a 7.3% annualized contraction rate).

The Federal Reserve fails to put these numbers into perspective:

1) Consumer credit has contracted during 15 of the past 16 reported months, and it is down a record total $148 billion over that time span.

2) The $14.9 billion in credit ‘lost’ during just April is the second highest monthly amount in history, second only to the $23.4 billion ‘lost’ during November, 2009.

3) And the nearly 6% cumulative reduction in consumer credit over the past 16 months is the largest (on a percentage basis) for any 16 month span since September 1944 — when FDR was still in the White House and people were buying War Bonds instead of tightly rationed consumer goods.

On July 12th Federal Reserve Chairman Ben Bernanke noted that small businesses were not getting the loans that they need to create new jobs. The Federal Reserve’s own data reports that lending to small businesses dropped to below $670 billion in Q1 2010, down about $40 billion (5.6%) from two years ago.

The New York Times reported Mr. Bernanke wondered: "How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability? No doubt all three factors have played a role."

Small businesses, which account for over 60% of gross job creation, are not – for whatever reason – tapping into the credit necessary to create those jobs.

What does this mean?

1) The reported credit contraction is real, at historic levels and on-going.

2) Although the Federal Reserve does not yet know whether the most recent consumer credit contraction is the result of consumer pay-downs or credit company write-offs, the fact remains that spending and the money supply are both being impacted negatively as consumers and small businesses (voluntarily or not) clean up their balance sheets.

Why is this happening?

1) The Federal Reserve may have brought interest rates down to essentially zero for their friends on Wall Street, but they can not control the real costs of borrowing money in "Main Street" America. People with revolving credit card balances are paying 18% to 25% (or more) APR on those balances. Most people with fixed mortgages are paying 4% to 6% (or more) on their balances. Meanwhile, risk free demand deposits earn at least an order-of-magnitude less than revolving credit costs — a historically low ratio.

2) The one or two orders-of-magnitude spreads between "real world" risk-free earnings and short term borrowing costs are large enough to change behavior. U.S. consumers and small business owners are not idiots (or sheep, for that matter), and if presented with the opportunity to ‘earn’ (by avoidance) 18% and 25% per year totally risk free, they will chose to deleverage their short term debt. And for people without revolving credit card balances even 4% to 6% ‘risk free’ looks good, especially if they can refinance mortgages and lock in a lower rate in the process — as our weekly refinancing index so vividly demonstrates.

weekly refinance thumb Behind the Credit Numbers by Rick Davis

The bottom line?

The Federal Reserve’s ultra-low interest rates are driving down the risk-free earnings rates of real people without meaningfully reducing the costs of short term debt. The irony of all this is that the historically low Federal Reserve rates are actually causing rational consumers to deleverage, rewarding them with historic real-world spreads to contract their credit.

On July 6th we reported that the nearly relentless decline in our ‘Daily Growth Index’ had leveled off, but cautioned that the index should be viewed from a longer perspective. Since then the decline has resumed:

commentary 2010 dailygrowthindexlast60days thumb Behind the Credit Numbers by Rick Davis

When the most recent period of contraction in our ‘Daily Growth Index’ (January 15, 2010 to date) is charted along with the similar ‘Daily Growth Index’ contraction events from 2006 and 2008 (with the first day of each contraction aligned on the left-hand axis) the relative severity of each contraction can be visualized.

commentary 2010 contraction watch thumb Behind the Credit Numbers by Rick Davis

One measure of the true severity of an economic slowdown is the ‘area under the curve’ (or ‘above’ the curve in this case) swept out by the ‘Daily Growth Index’ over time. This area is just the average magnitude of the decline times the duration of the contraction event. During the 2006 slowdown this area was about 136 percentage-days of contraction, while the 2008 event was much more severe at 793 percentage-days. The 2010 event has now reached 288 percentage-days, over twice the severity of 2006 and well over a third of 2008 ‘Great Recession’ — and it is still growing.

The key point to notice in the above chart is that if the current 2010 curve continues its current course, in about 20 days the 2010 slowdown will be more severe on a day-to-day basis than the 2008 ‘Great Recession’ was at the same point in its respective evolution. Unless the economy begins to pick up quickly, a double dip is likely — with the second round milder but lingering longer than the first.

Rick Davis provides research for the Consumer Metrics Institute

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Discover Spending Monitor – June Data

In the just released ‘Discover Spending Monitor’ data for June the index slipped to 88.4 from 90.4 in May.

The data is collected by a poll of 8,200 consumers that tracks consumer confidence and spending trends. In the June report 28% of those polled believe economic conditions are improving, a 3 point drop from May and a 6 point drop since April.

Consumer confidence is also slipping with 48% saying that economic conditions are getting worse, which is up 5 points over the past two surveys.

On the question about the future only 20% feel their financial situation is improving, a decline of 2 points from just last month.

With regard to future consumer spending there was little change in the number of people planning to increase spending on discretionary items.

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The full report is not yet available online, but when it is I will provide a link to the full report here. The source of this information is from the market news ticker service ‘Trade the News’ which I have been using for nearly 3 years.

‘Trade the News’ is a professional ticker service and they offer a free guest pass valid for 5 days for readers of RebelTraders by following this link. Just fill in the section “request a guest pass”.

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GDP Revisions and Consumer Behavior – Guest Post

I look forward to receiving updates from Rick Davis at the Consumer Metrics Institute. Once again Rick has allowed me to publish his latest update here for you.

On June 25th the BEA quietly revised its measurement of GDP growth for the first quarter of 2010 down for the second time, this time to 2.7%. The newly revised growth estimate nearly matches the Consumer Metrics Institute’s original projection for the first quarter, which was 2.62%. The big difference is that the Consumer Metrics Institute’s projection (based on our Daily Growth Index) was available on November 30, 2009 — seven months ago.

commentary 2010 dailygrowthindexvsgdp full GDP Revisions and Consumer Behavior   Guest Post

Because the Consumer Metrics Institute’s Daily Growth Index only lags the real-time consumer economy by several days and has a day-by-day time resolution, the Daily Growth Index can also tell us something totally missing in the BEA report: that the newly revised GDP ‘freeze frame’ picture captures a moment in time when consumer demand was dropping at a rate of about .08% per day. This means that the difference between the revised GDP and our original projection represents only a single day of economic change. But more importantly, our Daily Growth Index shows the dynamics of the economy at the point in time when the BEA ‘still picture’ was taken.

One other important note should be made about the June 25th BEA release: in it the BEA also increased the inventory component within the 2.7% number from 1.65% to 1.88%. That means that the net-after-inventory-adjustments number was less than 0.9%, and over two-thirds of the reported aggregate growth was from relatively unpredictable inventory swings.

If factories were unwittingly growing inventories during the first quarter in the face of what was really slackening consumer demand, the official GDP numbers for both the second quarter and the third quarter (to be released 4 days before the U.S. mid-term elections) could be interesting, since factories could very well over-correct again — but in the opposite direction.

Because Friday’s BEA release mirrors our Daily Growth Index from November 30th, the index’s subsequent course provides some insight into where the economy has been heading since then. Roughly half a quarter later (on January 15th, 2010) the index fell into net year-over-year contraction.

During the nearly two quarters since then the index has been showing mild but continued contraction. When that contraction is charted along with similar contraction ‘events’ from 2006 and 2008 it can be seen that 2010 is shaping up as wholly unique:

commentary 2010 contraction watch full GDP Revisions and Consumer Behavior   Guest Post

As the chart shows, the current contraction has progressed for nearly two quarters without yet tracing a clearly formed bottom. And any measure of the severity of an economic slowdown must include not only maximum rate of contraction, but duration as well. Although the 2010 event has been milder than 2008 in terms of absolute negative growth rates observed, if it progresses long enough the aggregate economic pain could be substantial. For a little perspective, the total economic impact of 2010′s contraction is already nearly twice what was experienced in 2006, when the GDP slipped to a barely positive +0.1% growth rate. And (to date) the total economic impact of the 2010 event represents nearly a full third of the pain experienced during the ‘Great Recession’ of 2008-2009.

The key message to take from these numbers is that the fundamental change in consumer behavior which we have been observing over the past three quarters is likely to be protracted. Although this change in behavior is most clearly shown in our data by consumer reluctance to take on new or increased debt, it probably reflects de-leveraging much more than balance sheets — almost certainly including de-leveraged consumer expectations for the near future.

At the Consumer Metrics Institute we measure day-by-day changes in the discretionary durable goods transactions of internet shopping consumers. We genuinely believe that the real economy lives where ‘Main Street’ consumers are (figuratively and/or literally) clicking ‘Add to Shopping Cart’, not where the BEA’s factories slavishly follow the consumer’s lead. The millions of consumers we measure respond collectively to what they see going on with their own local economy, family and friends. And right now real-world ‘Main Street’ consumers are demonstrating significant caution.

Rick Davis

Consumer Metrics Institute

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Best Buy (BBY) Reveals Troubling Quarter – Revenue Flatlines

This morning Best Buy (BBY) reported their Q1 2010 results and the data was simply terrible. Why was it terrible?

Best Buy Co Inc (BBY) Reports Q1 $0.36 v $0.50 expected EPS, Revenue $10.8B v $11B expected

First was sales revenue has flattened, no growth. The second reason is hidden within the EPS reported today. Wall Street was ‘expecting’ an EPS of $0.50 for the Q1, instead what Best Buy reported was $0.36 which is a fairly significant miss. But what does that miss suggest? It says that Best Buy increased their overhead costs (employees) in anticipation of consumers returning in droves. The only problem was that the consumers did not return in droves, which hit the EPS hard due to Best Buy ramping up their internal costs by bringing back some employees which is the most expensive part of any companies overhead costs.

Will the decline in retail sales that has been evident over the past several months mean Best Buy will have to go back to cost cutting (dropping employees again), or will they eat the costs in hopes the consumers will return in droves one day soon? It may be a long and lonely summer for Best Buy if they are going to hang on to that hope.

BBY ChartHave market analysts been doing you any favors? Following the Q4 earnings release on March 29 there have been 7 upgrades to buy and/or price targets being raised, and only 2 downgrades. Long time readers of my site already know my view of Wall Street analysts, so I will withhold my commentary on the ridiculous upgrades ahead of the poor earnings release this morning. I imagine there are plenty of investors who are none to happy right now.

Shares of Best Buy dropped just over 6% today on the disappointing earnings.

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Personal Finances Continue Decline – Guest Post

Rick Davis of the Consumer Metrics Institute has provided an update to his previous article published here on May 2nd. When Rick presented his research to the RebelTraders readers last month I was very impressed with the data and the subsequent findings.

I highly recommend Rick’s work so be sure to visit his site.

The Consumer Metrics Institute's Personal Finance Index continued its
decline for the sixth consecutive week, with it now showing a year-over-year
decline in consumer confidence in excess of 40%. This contrasted sharply
with the situation as recently as the end of January 2010, when the same
measure of confidence was showing a year-over-year gain in excess of 7%. The
Consumer Metrics Institute's Personal Finance Index is composed of a number
of data series, some of which collect transactions that are precursors to
the initiation of default and/or foreclosure activities. The levels of these
negative activities are inverted before being included in the 'Personal
Finance Index', so that a rapid rise in Consumer transactions with default
and foreclosure counseling services, for example, will drive that particular
index down.

weekly personal finance thumb Personal Finances Continue Decline – Guest Post 

The Personal Finance Index is not alone in reflecting continued weakness. In
fact, our 'Weighted Composite Index' (which is by far our best daily
aggregate measure of the consumer 'demand' side of the economy) has shown a
relatively steady deterioration since peaking in August 2009, with the
trailing month now recording contraction in excess of 2%.

monthly weighted composite thumb Personal Finances Continue Decline – Guest Post 

The sliding 'trailing quarter' as reflected in our 'Daily Growth Index' has
also reached a level consistent with a year-over-year contraction rate of
about 2%, after initially dropping into net contraction on January 15th.
When compared to previous contraction events in 2006 an 2008 this particular
episode of contraction in consumer demand is following a unique profile: at
it's worst it is still milder than the mild 2006 event but it has gone on
longer than even the 2008 event without forming a clear bottom.

commentary 2010 contraction watch thumb Personal Finances Continue Decline – Guest Post 

If the housing market is expected to recover soon, a significant increase in
demand for residential real estate loans will need to be occurring in the
near future. Although there has been a recent minor upturn in consumer
interest in refinancing on a year-over-year basis, it may only be a sign
that consumers are beginning to expect that the historically low mortgage
rates are nearing an end.

weekly refinance thumb Personal Finances Continue Decline – Guest Post 

A more telling development would be for a similar upturn in consumer
interest in new loans, which we have not seen. In fact the year-over-year
change in consumer interest in new loans has dropped to the lowest level we
have ever recorded, slightly surpassing the previous low set back in August
of 2008.

weekly home loans thumb Personal Finances Continue Decline – Guest Post 

If there is a strengthening recovery, we are not seeing clear signs of it.
In fact, we could argue that most consumers are increasing their already
substantial caution about taking on new debt, while others are exploring
their legal options should their current debt loads become harder to
manage.

Our data is significantly upstream economically from the factories and the
products measured by the GDP, putting us far ahead of the traditional
economic reports.

A PDF covering our methodologies is at
http://www.consumerindexes.com/overview.pdf.
The indexes themselves can be found at http://www.consumerindexes.com.

Thank you,

Richard Davis
Consumer Metrics Institute, Inc.

Excellent work Rick. Thank you for allowing me to share with my readers.

More on this topic (What's this?) Read more on Foreclosure at Wikinvest

What was the Economy Really Doing … Yesterday?

Several days ago I received an email from Rick Davis from the Consumer Metrics Institute. In his email Rick provided a very interesting analysis regarding consumer spending and the economy.

As I read through the data that Rick presented to me I was impressed with the methodology utilized and how he arrives at some unique forward looking indicators. I started an exchange with Rick and asked if he would be interested in putting together a collection of his findings for my readers. I was happy that Rick accepted the invitation as I believe his research is unique and shines a new light on the claims of a strong economic recovery.

What was the Economy Really Doing … Yesterday?

By Rick Davis, Consumer Metrics Institute

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 since.

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 images for full size)

commentary 2010 contraction watch full thumb What was the Economy Really Doing … Yesterday?

 

As you can see from the above chart the 2010 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.

In contrast to our measurements, 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. The BEA’s measurements of the economy are substantially “downstream” from the consumer activities that we measure. It simply takes many weeks for changes in consumer behavior to become reflected in production schedule changes at the factories.

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 earlier. This means that our “Daily Growth Index” of consumer “demand” side activity is now leading the production oriented GDP by 18 weeks:

commentary 2010 dailygrowthindexvsgdp full thumb What was the Economy Really Doing … Yesterday?

Compared to the 4th quarter of 2009, the annualized growth rate of the BEA’s official 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 this means that “the economy is still growing,” albeit at a historically normal rate. The bad news is that a normal growth rate would only warrant historically normal P/E ratios in the equity markets.

2). The “half empty” reading would mean that the near halving of the GDP’s growth rate confirms that (at the factory level) the economy has finally begun to “roll over” towards a “second dip”. 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.

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 sampling period would make a huge difference in the numbers being reported. For the calendar quarter the annualized growth rate 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, causing some consistency in the BEA’s consecutive estimates (5.7%, 5.9% and 5.6% respectively) of the quarter’s annualized growth rate. 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.

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 continues to lag our “Daily Growth Index” by 18 weeks we should see the 2nd quarter 2010 GDP contracting at a 1.5% clip.

I say “should” because we have observed before that factories are loath to actually contract production until rising inventory levels 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 must be made.

In summary, our data is telling us that U. S. consumers are very reluctant to take on the kind of debt that they have traditionally assumed when pulling the economy out of previous recessions. 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 respond.

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 by 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.

Several points about the Consumer Metrics Institute:

1). We are not economists, formally trained or otherwise. We are simply geeks who are analyzing real-time U.S. consumer tracking data in search of macro-economic trends. On-line marketers use the same data to serve up focused ads or to offer customized product suggestions. Why governmental agencies have not realized that the same data is a gold mine of current consumer economic macro tendencies amazes us.

2). This is a revolutionary new daily source of spin-free hard data about the demand side of the economy. It is purely objective data collected daily from millions of on-line transactions by U.S. consumers. It does not involve any governmental sources. It does not utilize ‘seasonal adjustments’ (all numbers are year-over-year). It is simply based on real-time U.S. consumer transactions (please see http://www.consumerindexes.com/Overview.pdf for more information).

3). I’m a physicist, so I understand numbers and the importance of monitoring physical systems in real-time — especially if you care about how the physical system is evolving and have some interest in keeping it from crashing. Measuring what was happening last quarter makes no sense (except, perhaps, for academic papers and governmental archives).

4). We’re not professional doom-sayers. In fact, we were wildly optimistic this time last year. We simply report the numbers — which at the moment just happen to be much less auspicious than the mainstream media has been reporting.

The Indexes themselves can be found at http://www.consumerindexes.com/index.html

Thank you,

Rick Davis

Consumer Metrics Institute

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I want to thank Rick for putting together this collection of his recent research. You can find more of Rick’s research at Consumer Metrics Institute