Today I am going to talk about our Gross Domestic Product (GDP). I want to make it clear at the outset that I do not consider GDP to be a valid measure of human welfare in the United States and neither should you. I discussed this subject most recently in GDP Is The Real Fraud and The Rich Are On The Rebound.
Tomorrow the BEA will release its advance estimate for GDP for the 1st quarter of 2010 (2010:Q1). The so-called "consensus" says GDP will grow anywhere between 2.7 and 4.5% (quarter over quarter change, seasonally adjusted annual rate). The average forecast calls for 3.4% growth. Should the advance estimate fall anywhere in the consensus range, you will be told that the economy is bouncing back, although it's very likely you didn't see any material improvement in your own situation. But I am not talking about propaganda today.
Rick Davis of the Consumer Metrics Institute (CMI) has been tracking online consumer purchases since 2006. Davis is a physicist, not an economist—Thank God! He's been tracking consumer demand in almost real time, mining and analyzing online sales data well ahead of measurements used by the BEA to establish GDP. The Daily Growth Index (below) has consistently "predicted" GDP 17 weeks ahead of the actual BEA number. So the BEA 2010:Q1 number reflects what was going on from (approximately) September to the end of November, 2009.
Here's the current chart and a quote from a radio interview Davis did as reported by Michael Panzer at Financial Armageddon.
As it happens, Larry Doyle (LD) long-time Wall Street veteran and publisher of Sense on Cents, just had Richard Davis (RD), the creator of the CMIGI, on his weekly radio show, "No Quarter Radio’s Sense on Cents with Larry Doyle," where they discussed the indicator and what it might be saying about the health of economy.
LD: Could I be so abrupt and ask you what 1st quarter GDP is going to be?
RD: 1st quarter GDP, we would guess, is going to be about 2.5%. The reason I say that is that’s where our numbers were 17 weeks earlier. What we notice is that our Daily Growth Index, as we call it, leads the GDP at least over the last 6 quarters by about 17 weeks.
LD: Wow!! That right there is an unbelievable statistic. I mean 17 weeks, heck, that’s more than a quarter itself.
RD: Yes, yes it is. In fact, the 1st quarter GDP will approximate where our numbers were at the end of November.
LD: So if that is the case, instead of 1st quarter GDP, could I be so bold as to ask what you think 2nd quarter GDP is going to be?
RD: Oh you may, you may! We would guess that the 2nd quarter is going to end up in contraction by about 1.5%. [My note: that's a negative 2nd quarter]
RD: That’s where consumers are at right now.
LD: You’re saying again, I just want to go over that, you’ve got 2nd quarter GDP contracting by 1-1.5%. You think that’s just a function of the wearing off of stimulus? Wow!! That’s a big number. You’re not going to make a lot of friends in Washington with that call.
RD: We don’t get invited to the Washington parties!
Don't worry about it, Rick—I don't get invited to Washington parties either! The Daily Growth Index predicts that tomorrow's number will be about 2.5%, which is at the low end of the consensus range, while the 2nd quarter number will show an economy in recession again (-1.5%). Bear in mind that the BEA's number is the advance number, which often gets revised downward. So even if Rick's predicted growth rate is too low, you'll have to wait a bit longer to see if he's right.
Davis recently sent me an update on things from which I'll quote—
As you can see from the chart [above] the current 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 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.
So there you have it. Do we have walking pneumonia? Or our we getting healthy again? If you're a regular reader of DOTE, you already know I think the patient is (in some sense) terminal. The importance of CMI's results lies in the timing of events. Is the economy going to go back into recession in the 2nd quarter of this year? Or will stimulus-driven growth persist throughout 2010 as the Democrats hope. If Davis is right, the economy will be "officially" shrinking 6 months before the 2010 mid-term elections.
The 3rd quarter GDP number (2010:Q3) will be released just a week or so before the actual election itself. The CMI data (in the charts above) seems to indicate that the 2010:Q3 GDP growth rate will also be negative, or at best, flat. Over the longer haul, a "double dip" in the economy will lower government revenues, which makes a sovereign debt crisis in the United States more likely. Or the dip will make tax increases more likely. Etc.
We are blessed—condemned?—to live in interesting times.