Consumer Metrics Institute: The Contraction Continues to Deepen

   Consumer Metrics Institute: The Contraction Continues to Deepen
April 6, 2011
I've updated my Consumer Metrics Institute (CMI) charts through the latest data.
Background
For those unfamiliar with these data series, here is a link to the Institute's website. Their page of frequently asked questions is an excellent introduction to the service. See also the Institute's March 22 commentary, The BEA's Third Estimate of Fourth Quarter 2010 GDP.
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 the economy for the time being, 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. 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 calls undercuts this assumption. On the other hand, we are living through some unusual economic times. It remains to be seen if the disconnect between the CMI Growth Index and the market 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.
Does the CMI Growth Index Provide A Comprehensive Snapshot of the U.S. Consumer?
In January 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.
In sum, we can't take the CMI Growth Index as an indicator of the consumer economy as a whole, but it clearly offers important insight into the health of the consumer. In fact, it is a demographic segment on which the future of the economy will become increasingly dependent. It seems difficult to imagine a sustained business cycle and long-term economic recovery while the CMI demographic sweet-spot sputters in a year-over-year contraction.

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Why Consumer Spending is Down Despite Economic Upticks

By Eric Fry

03/31/11 Laguna Beach, California – Today’s issue of The Daily Reckoning finds a resurgent US stock market. Despite dipping – briefly – into the red for the year-to-date a couple weeks ago, the S&P 500 is closing out the first quarter with a gain of 6%! Despite the noteworthy stresses around the globe – and the considerable economic uncertainties here at home – the S&P sits less than one percent below its peak levels of the last two-and-a-half years.

So the stock market’s doing pretty darn well. The US consumer…not so much. The chart below, for example, looks nothing like the ascendant price chart of the S&P 500 Index.

Consumer spending, apart from spending on essentials like food and gasoline, is sluggish at best. A chart of disposable income, after taxes and inflation, would look equally dismal. In other words, despite some measurable upticks in economic activity, these upticks are failing to bear much fruit down at the level where real people earn and spend money. Inflation is chewing up almost all the statistical economic gains of the last several months.

Even though incomes are rising somewhat, inflation is rising just as quickly…which means that net wealth is going nowhere. Perhaps that’s why companies like Marriott International are posting disappointing earnings results. Earlier this week, Marriott disclosed that its “revenue per available room” (Revpar) will be lower than originally forecast, due to weakness in North American demand. International revenue remains “robust” however, according to Marriott.

Perhaps this “weakness in North America” is a one-off or perhaps it is a sign of things to come. Whatever the case, the contrast between the sluggish growth rates of the world’s Developed Markets and the robust growth rates of the world’s Emerging Markets is very real…and this contrast is becoming a staple of the global investment environment.

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

View articles by Eric Fry

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

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Why Consumer Spending is Down Despite Economic Upticks

By Eric Fry

03/31/11 Laguna Beach, California – Today’s issue of The Daily Reckoning finds a resurgent US stock market. Despite dipping – briefly – into the red for the year-to-date a couple weeks ago, the S&P 500 is closing out the first quarter with a gain of 6%! Despite the noteworthy stresses around the globe – and the considerable economic uncertainties here at home – the S&P sits less than one percent below its peak levels of the last two-and-a-half years.

So the stock market’s doing pretty darn well. The US consumer…not so much. The chart below, for example, looks nothing like the ascendant price chart of the S&P 500 Index.

Consumer spending, apart from spending on essentials like food and gasoline, is sluggish at best. A chart of disposable income, after taxes and inflation, would look equally dismal. In other words, despite some measurable upticks in economic activity, these upticks are failing to bear much fruit down at the level where real people earn and spend money. Inflation is chewing up almost all the statistical economic gains of the last several months.

Even though incomes are rising somewhat, inflation is rising just as quickly…which means that net wealth is going nowhere. Perhaps that’s why companies like Marriott International are posting disappointing earnings results. Earlier this week, Marriott disclosed that its “revenue per available room” (Revpar) will be lower than originally forecast, due to weakness in North American demand. International revenue remains “robust” however, according to Marriott.

Perhaps this “weakness in North America” is a one-off or perhaps it is a sign of things to come. Whatever the case, the contrast between the sluggish growth rates of the world’s Developed Markets and the robust growth rates of the world’s Emerging Markets is very real…and this contrast is becoming a staple of the global investment environment.

Eric Fry
for The Daily Reckoning

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

View articles by Eric Fry

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

US Consumer Confidence Plunges

03/31/11 St. Louis, Missouri – March has been a very volatile month for the currencies and commodities, including gold and silver. But, on the last day of the month, they are stronger than they were at the beginning of the month…

Front and center this morning, we saw that Eurozone inflation moved well above the European Central Bank’s (ECB) ceiling target of 2%, printing at 2.6% for March, and increase from February’s printing of 2.4%… The 2.6% inflation rate is the fastest move in inflation since October of 2008, and, for those of you keeping score at home, March’s 2.6% inflation rate marks the fourth consecutive month of inflation exceeding the ceiling target.

This news has the euro (EUR) rising over 1.42, and is really putting the pressure on the ECB and ECB President, Trichet, to hike rates, which everyone and their brother now believes will happen soon.

I have to say that this pending move by the ECB has really opened some eyes around the world… For the first time in some time, interest rate differentials are going to come back, and be a force to reckon with. Sure, Australia, Brazil, Norway and Sweden have all raised rates in the past year and more, but if the ECB would raise rates, it would mean that the first MAJOR currency (dollar, yen, euro) has raised rates, and the rate differential between the euro and the other two (dollars and yen) would increase… This opens Pandora’s Box of rate differentials, and really highlights the fact that there are other currencies out there, besides euros, that already have rate/yield differentials versus the dollar and yen. And then the next thing you know, we have an all out assault on the dollar and yen again… As Chris told you, the carry trade is going to be the Cat’s Meow (ok I said that!) again!

And then we had US consumer confidence plunge, printing an index number of 81.1 in March… The fall was from an index number of 97.5 in February. This print of 81.1 represents its lowest level in five months. Seems the rising gas prices at the pumps is causing consumers to lose confidence… Hmmm… It’s about time, I would say… And then just wait till the government pulls the rug out from under stock prices…

We also saw January’s S&P/Case-Shiller 20-city composite home price report fall for the seventh straight month, though dropping by a smaller-than-expected 0.2% on a seasonally-adjusted basis from December (market expectations were for a 0.45% decline). The thing that really scares the bejeebers out of me is the fact that the monthly decline brings the index within one point of the recessionary low seen in May 2009! And… 11 metropolitan areas included in the measure dipped below the troughs seen during the recession.

And then, what do we have here? OK… I’ll let you decide, and then we’ll meet up again below, to see if we agree on what this all means… First of all… My good friend, Sean Hyman, sent me this last night… FDIC’s Bair admits that low interest rates have caused a “bond bubble”. And then reader, Scott, sent me this note this morning… “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing US debt burden.” So… What do you think? Could this be… You decide, quick!

OK… I’m sure you all have now come to the thought that Chuck was bang on with his Treasury Bubble theory/call, and when people like Sheila Bair, and Bill Gross, see it, then it just puts that theory/call on terra firma, eh? Hey! Even a blind squirrel can find an acorn, folks, so I’m not patting myself on the back here, I’m just pointing out that I was the first to call a Treasury Bubble on the horizon, and now others are seeing it too! And like I said above regarding stocks… Just wait until the government pulls the plug on the bond buying…

Of course, I’ve also said that we’ll see QE3… And here’s the thing to remember… QE2 didn’t happen right after QE1, and so QE3 will not come along until the Fed Heads see that unemployment isn’t improving, mortgage rates are rising because of Treasury yields rising, and stock prices are falling through the floor… Later this year? Probably, but with all the quantitative easing that’s been put into the system, we could be looking at early next year…

Enough of that! Let’s look at some of the nice gains in the currencies overnight… The Aussie dollar (AUD) has moved well into the $1.03 handle, and the Brazilian real (BRL) gained 1% yesterday, pushing the real to the strongest level versus the dollar since August 2008… OK… We all remember what happened in August 2008 (it really began in July 2008), when all the walls came crashing down, and Humpty Dumpty has never been put back together again, here in the US. So… If we go back in time, we will see that the Brazilian real was kicking tail and taking names… But the real wasn’t the only currency doing so versus the dollar… In July of 2008 it looked like the end was near for the dollar, but then along came the financial meltdown…

And that’s interesting because now, today March 31, 2011, the Aussie dollar is stronger than it was in July of 2008… Along with most currencies (excluding the euro and sterling (GBP)), which have their own problems to deal with) So… Is the dollar on the tracks once again to oblivion? I doubt it… While the tracks seem to be greased right now, there will be a detour at some point, because the US cannot have everyone heading to the exit doors on the dollar at the same time, they need all the central banks and foreign investors to stay around, while they deficit spend… And deficit spend, and deficit spend… Hey! Did I mention deficit spending?

And… Here’s one thing that could put a damper on Chinese renminbi (CNY) gains versus the dollar, thus supporting the dollar… Chinese banks must cut their short dollar positions and also reduce their short-term foreign debt holdings, the currency regulator said on Wednesday.

The tightening of existing restrictions is the latest step by China to cut the scope for inflows of capital betting on faster yuan appreciation. In a short statement on its website, the State Administration of Foreign Exchange said it wanted to prevent illegal capital inflows and protect national financial security.

Chinese banks with dollar-short positions of $2 billion or more as of November 8 must reduce them by 60%, SAFE said. Banks with a dollar short of $2 billion or less must cut this position in half.

The euro’s rise that we talked about earlier, is being held back by the anticipation of what Ireland’s Stress Test results will reveal later this morning. I just don’t know what the traders are looking for here… The report is going to be bad…. I guess traders will be looking for degrees of “how bad” things are, I guess…

It’s Thursday, so the Weekly initial jobless claims will print, along with the Chicago Purchasing Manager (manufacturing) report for March, and February Factory Orders… I doubt any of this is market moving, but will most likely cause people to sit back and think about the so-called US recovery a bit…

Speaking of the so-called recovery… You know, that car sales here in the US have been quite strong so far this year; I even bought my beautiful bride a new car! But, I can’t help but think that the car sales are going to hit a speed bump here soon, as the horrible things going on in Japan, are going to put a crimp on the manufacturing of car parts… And unless you’re buying a German car, even US cars depend on Japanese car parts… So, I know, you’re thinking, Geez Chuck, you come back from baseball heaven, and you have to be this negative about the recovery? Yes… Facts are facts, no matter what your government tells you is going on…

Then there was this (from Bloomberg)…

Today, the Fed is set to disclose which banks borrowed from its discount window during the darkest moments of the 2008-09 financial crisis. This unprecedented view of the emergency loans the Fed extended to hundreds of banks is the result of a March 21 Supreme Court decision that left intact lower court rulings ordering disclosure in lawsuits filed by Bloomberg LP, parent of Bloomberg News, and News Corp.’s Fox News Network. Still, the Fed won’t disclose the collateral it accepted, which would reveal the risks it took. Future discount window borrowings will be made public, though only after a two-year delay, thanks to the new Dodd-Frank financial reform law.

What a bunch of bunk! Two years later? And we still won’t know the risks the Fed took on? Give me a break! And they call that transparency? That’s as transparent as thick mud!

To recap… The currencies today are stronger versus the dollar on news that interest rate differentials may be back in place, and that the ECB could very well be on its way to hiking rates, given the latest Eurozone Inflation report. Currencies like the Aussie dollar and Brazilian real are stronger now than before the financial meltdown, as then, it looked as though the end was near for the dollar. A couple of big names lend credence to Chuck’s call of a Treasury Bubble, and manufacturing here in the US (what’s left of it) could be facing new challenges from the lack of parts from Japan.

Chuck Butler
for The Daily Reckoning

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

For additional information visit EverBank

View articles by Chuck Butler

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

US Consumer Confidence Plunges

03/31/11 St. Louis, Missouri – March has been a very volatile month for the currencies and commodities, including gold and silver. But, on the last day of the month, they are stronger than they were at the beginning of the month…

Front and center this morning, we saw that Eurozone inflation moved well above the European Central Bank’s (ECB) ceiling target of 2%, printing at 2.6% for March, and increase from February’s printing of 2.4%… The 2.6% inflation rate is the fastest move in inflation since October of 2008, and, for those of you keeping score at home, March’s 2.6% inflation rate marks the fourth consecutive month of inflation exceeding the ceiling target.

This news has the euro (EUR) rising over 1.42, and is really putting the pressure on the ECB and ECB President, Trichet, to hike rates, which everyone and their brother now believes will happen soon.

I have to say that this pending move by the ECB has really opened some eyes around the world… For the first time in some time, interest rate differentials are going to come back, and be a force to reckon with. Sure, Australia, Brazil, Norway and Sweden have all raised rates in the past year and more, but if the ECB would raise rates, it would mean that the first MAJOR currency (dollar, yen, euro) has raised rates, and the rate differential between the euro and the other two (dollars and yen) would increase… This opens Pandora’s Box of rate differentials, and really highlights the fact that there are other currencies out there, besides euros, that already have rate/yield differentials versus the dollar and yen. And then the next thing you know, we have an all out assault on the dollar and yen again… As Chris told you, the carry trade is going to be the Cat’s Meow (ok I said that!) again!

And then we had US consumer confidence plunge, printing an index number of 81.1 in March… The fall was from an index number of 97.5 in February. This print of 81.1 represents its lowest level in five months. Seems the rising gas prices at the pumps is causing consumers to lose confidence… Hmmm… It’s about time, I would say… And then just wait till the government pulls the rug out from under stock prices…

We also saw January’s S&P/Case-Shiller 20-city composite home price report fall for the seventh straight month, though dropping by a smaller-than-expected 0.2% on a seasonally-adjusted basis from December (market expectations were for a 0.45% decline). The thing that really scares the bejeebers out of me is the fact that the monthly decline brings the index within one point of the recessionary low seen in May 2009! And… 11 metropolitan areas included in the measure dipped below the troughs seen during the recession.

And then, what do we have here? OK… I’ll let you decide, and then we’ll meet up again below, to see if we agree on what this all means… First of all… My good friend, Sean Hyman, sent me this last night… FDIC’s Bair admits that low interest rates have caused a “bond bubble”. And then reader, Scott, sent me this note this morning… “Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing US debt burden.” So… What do you think? Could this be… You decide, quick!

OK… I’m sure you all have now come to the thought that Chuck was bang on with his Treasury Bubble theory/call, and when people like Sheila Bair, and Bill Gross, see it, then it just puts that theory/call on terra firma, eh? Hey! Even a blind squirrel can find an acorn, folks, so I’m not patting myself on the back here, I’m just pointing out that I was the first to call a Treasury Bubble on the horizon, and now others are seeing it too! And like I said above regarding stocks… Just wait until the government pulls the plug on the bond buying…

Of course, I’ve also said that we’ll see QE3… And here’s the thing to remember… QE2 didn’t happen right after QE1, and so QE3 will not come along until the Fed Heads see that unemployment isn’t improving, mortgage rates are rising because of Treasury yields rising, and stock prices are falling through the floor… Later this year? Probably, but with all the quantitative easing that’s been put into the system, we could be looking at early next year…

Enough of that! Let’s look at some of the nice gains in the currencies overnight… The Aussie dollar (AUD) has moved well into the $1.03 handle, and the Brazilian real (BRL) gained 1% yesterday, pushing the real to the strongest level versus the dollar since August 2008… OK… We all remember what happened in August 2008 (it really began in July 2008), when all the walls came crashing down, and Humpty Dumpty has never been put back together again, here in the US. So… If we go back in time, we will see that the Brazilian real was kicking tail and taking names… But the real wasn’t the only currency doing so versus the dollar… In July of 2008 it looked like the end was near for the dollar, but then along came the financial meltdown…

And that’s interesting because now, today March 31, 2011, the Aussie dollar is stronger than it was in July of 2008… Along with most currencies (excluding the euro and sterling (GBP)), which have their own problems to deal with) So… Is the dollar on the tracks once again to oblivion? I doubt it… While the tracks seem to be greased right now, there will be a detour at some point, because the US cannot have everyone heading to the exit doors on the dollar at the same time, they need all the central banks and foreign investors to stay around, while they deficit spend… And deficit spend, and deficit spend… Hey! Did I mention deficit spending?

And… Here’s one thing that could put a damper on Chinese renminbi (CNY) gains versus the dollar, thus supporting the dollar… Chinese banks must cut their short dollar positions and also reduce their short-term foreign debt holdings, the currency regulator said on Wednesday.

The tightening of existing restrictions is the latest step by China to cut the scope for inflows of capital betting on faster yuan appreciation. In a short statement on its website, the State Administration of Foreign Exchange said it wanted to prevent illegal capital inflows and protect national financial security.

Chinese banks with dollar-short positions of $2 billion or more as of November 8 must reduce them by 60%, SAFE said. Banks with a dollar short of $2 billion or less must cut this position in half.

The euro’s rise that we talked about earlier, is being held back by the anticipation of what Ireland’s Stress Test results will reveal later this morning. I just don’t know what the traders are looking for here… The report is going to be bad…. I guess traders will be looking for degrees of “how bad” things are, I guess…

It’s Thursday, so the Weekly initial jobless claims will print, along with the Chicago Purchasing Manager (manufacturing) report for March, and February Factory Orders… I doubt any of this is market moving, but will most likely cause people to sit back and think about the so-called US recovery a bit…

Speaking of the so-called recovery… You know, that car sales here in the US have been quite strong so far this year; I even bought my beautiful bride a new car! But, I can’t help but think that the car sales are going to hit a speed bump here soon, as the horrible things going on in Japan, are going to put a crimp on the manufacturing of car parts… And unless you’re buying a German car, even US cars depend on Japanese car parts… So, I know, you’re thinking, Geez Chuck, you come back from baseball heaven, and you have to be this negative about the recovery? Yes… Facts are facts, no matter what your government tells you is going on…

Then there was this (from Bloomberg)…

Today, the Fed is set to disclose which banks borrowed from its discount window during the darkest moments of the 2008-09 financial crisis. This unprecedented view of the emergency loans the Fed extended to hundreds of banks is the result of a March 21 Supreme Court decision that left intact lower court rulings ordering disclosure in lawsuits filed by Bloomberg LP, parent of Bloomberg News, and News Corp.’s Fox News Network. Still, the Fed won’t disclose the collateral it accepted, which would reveal the risks it took. Future discount window borrowings will be made public, though only after a two-year delay, thanks to the new Dodd-Frank financial reform law.

What a bunch of bunk! Two years later? And we still won’t know the risks the Fed took on? Give me a break! And they call that transparency? That’s as transparent as thick mud!

To recap… The currencies today are stronger versus the dollar on news that interest rate differentials may be back in place, and that the ECB could very well be on its way to hiking rates, given the latest Eurozone Inflation report. Currencies like the Aussie dollar and Brazilian real are stronger now than before the financial meltdown, as then, it looked as though the end was near for the dollar. A couple of big names lend credence to Chuck’s call of a Treasury Bubble, and manufacturing here in the US (what’s left of it) could be facing new challenges from the lack of parts from Japan.

Chuck Butler
for The Daily Reckoning

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

For additional information visit EverBank

View articles by Chuck Butler

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

More on the Consumer Confidence Nose Dive

More on the Consumer Confidence Nose Dive
March 30, 2011  Revised Update with Guest Commentary by John Lounsbury 

Note from dshort: Here is an updated version of my post on the March Consumer Confidence Index, which now includes additional analysis and a series of graphs from John Lounsbury, the Managing Editor, EconIntersect, and Senior Contributor at TheStreet.com. The consumer needs Prozac® — she/he is depressed and suffering from a relapse into a difficult mental state. The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through March 16. The 63.4 reading was lower than the consensus estimate of 65.0, reported by Briefing.com and a dramatic nose dive from the February upward revision of 72.0. Here is an excerpt from the Conference Board report. Says Lynn Franco, Director of The Conference Board Consumer Research Center: "The sharp decline in confidence was prompted by a sharp decline in expectations. Consumers' inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions. On the other hand, consumers' assessment of current conditions improved, indicating that while the short-term future may be uncertain, the economy continues to expand."

Consumers' assessment of current conditions improved in March. Those claiming business conditions are "good" increased to 15.1 percent from 12.4 percent, while those claiming business conditions are "bad" decreased to 37.0 percent from 39.3 percent. Consumers' appraisal of the job market, however, was slightly less favorable than in February. Those saying jobs are "hard to get" edged up to 44.6 percent from 44.4 percent, while those stating jobs are "plentiful" dipped to 4.4 percent from 4.9 percent.

Consumers' short-term outlook was considerably less favorable than in February. The proportion of consumers expecting business conditions to improve over the next six months declined to 20.6 percent from 25.2 percent, while those anticipating business conditions will worsen increased to 16.2 percent from 10.3 percent. Consumers were also more downbeat about the labor market. Those expecting more jobs in the months ahead declined to 19.9 percent from 21.2 percent, while those anticipating fewer jobs rose to 20.7 percent from 15.0 percent. The proportion of consumers expecting an increase in their incomes declined to 15.3 percent from 17.4 percent.   More...

The Sobering Historical Context

Let's take a step back and put Lynn Franco's interpretation in a larger perspective. The table here shows the average consumer confidence levels for each of the five recessions during the history of this data series, which dates from June 1977. The latest number well above the bottom of the unprecedented trough in 2008, but it is below the average confidence level of recessions a full 21 months after the end of the Great Recession (based on the official call of the National Bureau of Economic Research).

The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing indicator of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today's reading of 63.4 is significantly below the 84.7 of the current regression level (25.1% below, to be precise).

It is interesting that the consumer confidence pattern of the past 18 months following the NBER declared end to the recession is similar to the 36-month pattern following the 1990-1991 recession, although the current pattern has so far been at a lower confidence level. At an even higher level, there was also a two year period following the 2001 recession where confidence lagged. The common factor in all three cases is a "jobless recovery". Consumer Confidence appears to be a proxy for unemployment problems.

However, John Lounsbury has created a series of graphs that indicate there are major differences in the behavior of consumer confidence during and following each of the five most recent recessions, even the 1991-1992 event. These are presented below, followed by some comments that John has provided.

Lounsbury Figure 1

Lounsbury Figure 2

Lounsbury Figure 3

Lounsbury Figure 4

Here are some comments provided by John Lounsbury:

These four graphs are somewhat redundant but each shows a slightly different aspect of the data. Figure 1 shows how extraordinary consumer sentiment was during the 2001 recession. This was perhaps influenced by the togetherness and sense of rallying to the bosom of the nation that followed the 9/11 attacks. Figure 2 shows the relatively deep depression of confidence during the 2007-2009 recession, even compared to the severe recession of 1981-1982. Figure 2 shows the relatively deep depression of confidence in the 21 months following the official end of the recession of 2007-2009. It is particularly of note that only two of the three so-called "jobless recoveries" show low consumer confidence. Again, there may be a national rallying sentiment from 9/11 still having an effect in 2002 -2003. Note that there is little difference in the consumer sentiment for the recovery from the 1980 recession when we include the first nine months of the next recession. Figure 3 displays the consumer sentiment numbers during and following the last five recessions. The differences for the averages for all five recessions and recoveries are plotted. Again the outlier nature of consumer sentiment associated with the 2001 recession and recovery are clear. Also Figure 3 shows the 2007-2009 recession and recovery periods are the only pair for the five recessions that are both below the averages — and each is below by a large multiple compared to the other four recessions/recoveries. Figure 4 shows the data from Figure 3 with a different organization, where consumer confidence is averaged over all the months of each recession plus the first 21 month following the end of the recession. Figure 4 does nothing more than emphasize the same observations noted for Figure 3. The Great Recession is aptly named with respect to its impact on the psyche of the consumer.

On a percentile basis, the latest reading is at the 17th percentile of all the monthly readings since the start of this data series in June 1977 and at the 11th percentile of all the non-recessionary months.

For a confirming perspective on consumer attitudes, see my post on the similar cliff-dive in the most recent Reuters/University of Michigan Consumer Sentiment Index. Here is the chart from that post.

And finally, let's take a look at the correlation between consumer confidence and small business sentiment, the latter by way of the National Federation of Independent Business (NFIB) Small Business Optimism Index. As the chart illustrates, the two have been closely correlated since the onset of the Financial Crisis.

The NFIB index has been less volatile than the Conference Board Consumer Confidence Index, but it has likewise remained bleak despite the official end to the recession in June 2009.

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Consumer Metrics Institute: In Advance of Friday's Retail Sales

Consumer Metrics Institute: In Advance of Friday's Retail Sales
March 7, 2011

With the February Advance Retail Sales report coming out on Friday, I realized that a few weeks have passed since I've updated the analysis of personal consumption from the Consumer Metrics Institute (CMI). I'll start with an overlay since 2010 of the CMI Weighted Composite and Growth Indexes.

Background

For those unfamiliar with these data series, here is a link to the Institute's website. Their page of frequently asked questions is an excellent introduction to the service. See also the Institute's February 25 commentary, Inside the BEA's New Lower Estimate of 4Q-2010 GDP Growth.

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 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.

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. 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. It remains in contraction territory although the contraction has become less severe. 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.

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.

Th 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.

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.

In sum, we can't take the CMI Growth Index as an indicator of the consumer economy as a whole, but it clearly offers important insight into the health of the consumer. In fact, it is a demographic segment on which the future of the economy will become increasingly dependent. It seems difficult to imaging a sustained business cycle and long-term economic recovery while the CMI demographic sweet-spot sputters in a year-over-year contraction.

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