chart of the week - US economic growth / fading 'stimulus'
(snip)"We had massive stimulus applied to the economy in 2009 and through the first half of this year. That stimulus is now beginning to fade. Besides keeping us out a major deflationary recession or even depression, it was supposed to get us to a place where consumer spending and GDP growth would become organic and not need further stimulus packages. The Congressional Budget Office just delivered a report on the effects of the stimulus. Let's review.
"... instead of losing 8.3 million jobs between the end of 2007 and the end of 2009, without [the stimulus package] the toll would have been 9.8 million -- and instead of gaining 522,000 jobs since the end of last year, we'd have lost another 328,000. And instead of peaking at 10.0% at the end of 2009 and falling modestly since, without ARRA, the jobless rate would have continued to climb to 11.2%. ... taking the midpoint of the CBO's estimates, GDP would have been down 1.1% between 2008Q3 and 2010Q1 instead of up 1.8%." ()
I know many of you, gentle readers, will take that finding with several grains of salt, but in general they do have a point. If you shove a stimulus of 4% of GDP into the system, you will get a rise in GDP. Let's set aside whether the stimulus was well-planned and properly targeted (it wasn't), and focus on the larger picture.
Without the stimulus, according to the CBO, we would still be barely out of recession. So the question becomes, what happens when the stimulus goes away in the latter half of the year? Have we gotten the economy to the point where it can grow on its own? To answer that let's take a look at some leading indicators.
First, let's take a peek at data from the Economic Cycle Research Institute (ECRI). The leading economic indicator, which led the recovery by about four months, fell in April and is now at a 47-week low. It is not signaling a recession (yet) but it does suggest that growth in the latter half of the year will be in the range of 1-1.5%. That is not enough to cut into the unemployment numbers in any meaningful fashion. (Economists generally think that GDP growth in the range of 3.5% is needed to really create job growth.)
A Negative 2% GDP in the Third Quarter?
And now let me introduce you to a new economic metric from the Consumer Metrics Institute. They track consumer discretionary spending on a daily basis. ( - hat tip Bill King.) From their web site:
"The Consumer Metrics Institute was founded on a simple observation: many 'leading' economic indicators are published, but few (if any) are sufficiently 'leading' to be meaningful to investors. In fact, many 'leading' indicators use the prior month's equity market results as a key component of their indexes. Investors may find their most recent month-end account statements more timely.
"To remedy this, the Consumer Metrics Institute has developed (and is continuing to develop) techniques for monitoring 'up-stream' economic activities on a daily basis. The daily consumer sampling process commenced in 2004, and several years of data were required to refine the process and statistically analyze how the timing of our indexes related to other 'leading' indicators, including the equity markets. The 2008-2009 recession provided a final validation of the methodologies and confirmed a multi-month lead relative to other commonly referenced indicators."
Their Consumer Metrics Institute Growth Index, which is the composite of a number of sub-indices, seems to lead GDP growth by about 4-5 months. Look at this chart showing the index and GDP growth for the past four years.
http://static.safehaven.com/authors/mauldin/17032_a.png
"On May 27th the BEA released its first revision to its 1st Quarter 2010 GDP growth rate measurement, lowering the number from a 3.2% annualized growth rate to 3.0% annualized growth. One day later the Consumer Metrics Institute's 'Daily Growth Index' was signaling what we should expect the BEA's measurement of the 3rd Quarter 2010 GDP growth rate to be contracting at about a 2.0% rate.
"The prior BEA estimate of 1st Quarter 2010 GDP growth trailed our 'Daily Growth Index' by 127 days, and because of the rapid rate that the economy was cooling when the measurements were being made the newly adjusted estimate is now trailing our 'Daily Growth Index' by 125 days. Since the 3rd Quarter of 2010 ends 125 days after May 28th (when our 'Daily Growth Index' was recording a 'growth' rate of -1.99%), if the BEA estimates continue to trail our 'Daily Growth Index' in a consistent manner we should expect that the 3rd Quarter's GDP 'growth' rate will be in the -2.0% neighborhood."
Wow. A negative 2% in the quarter starting next month? How can that be? Let's look at what caused the recent growth.
First-quarter GDP was revised down to 3% last week by the BEA (Bureau of Economic Analysis). But buried in that release was an upward revision to inventories, which accounted for over half of that 3%. At some point inventories become balanced and no longer grow.
And that may already be happening. We got the ISM number on Wednesday, and it came in somewhat above consensus at a quite robust 59.7. But when you look at the inventory sub-component, you find a different picture. It was slightly negative in April and dropped another 3.8 in May to be down to 45.6. This is a drop in that index of 9.7 points in just two months (anything north of 50 shows growth and below 50 suggests no growth or actual retreat).
Increases in inventory count as a plus when you are figuring GDP. If inventories are not growing, that figures to be a drag on second-quarter GDP.
And a significant part of the growth in the past three quarters came from transfer payments from the government (AKA stimulus), which are going away. The money received by state and local governments, which allowed them to keep employees on the job, is now being taken off the table; and the stories of state and local governments having to cut back are everywhere."(snip)
with many thanks to John Maudlin .... from
In regard to the relevance of the Consumer Metrics Growth Index to Dollar Den readers, it might be worth your while to compare the CMGI chart to a DOW chart ...
... because the CMGI direction has reliably led the DOW direction by about 2 months !!!
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