A very telling consumer sentiment analysis

[Rajiv]

Consumer Sentiment Metric


Couple that with - Consumers Still Chopping Up The Credit Cards, As June Revolving Credit Falls Again

The process of cutting up credit cards continues.
The Fed is out with June consumer credit data (correction: the post originally identified it as July data... there is one-month lag), and it shows that while total consumer credit fell just .7%, revolving consumer credit shrank 6.5% on an annualized basis.
On a sequential basis, the decline went from $831 billion to $826 billion.

And you get

Also Consumer Metrics Institute's Contraction Watch

[Jim Nickerson]

Re: A very telling consumer sentiment analysis

Rajiv, just what are these charts "telling?" For instance, is the end of the world near? Will the Republicans gain control of the world in November and in 2012 will Palinomics provide the road to US world dominance in all things? What is the "tell?"

[KGW]

Re: A very telling consumer sentiment analysis

latimes.com/business/la-fi-0807-petruno-20100807,0,7919318.column

Should the Fed try to push long-term interest rates even lower?
Another unconventional move to ease credit could backfire, if it fuels renewed pessimism about the economy's trajectory.

Tom Petruno

Market Beat

August 7, 2010

If the economy were careening into another recession, Federal Reserve policymakers would know exactly what to do: Rent out the Air Force, print money and rain it all over America.

Figuratively speaking, of course.

They'd also know what to do if the recovery began to accelerate, pushing up the inflation rate. That's in the first chapter of the Central Banking 101 textbook: You start tightening credit by raising short-term interest rates.

The current state of affairs, however, is much more of a challenge for the Fed. If the economy is just going to muddle through for an extended period, what's appropriate central bank policy?

The Fed might just prefer to sit still. But after the government's report Friday that the economy lost jobs in July, the pressure is certain to intensify on policymakers to do something.

With the Fed's benchmark short-term interest rate already near zero, that gun is out of bullets. That leaves long-term rates.

On Tuesday, when Fed policymakers hold their midsummer meeting, they're expected to take up the question of whether to try to engineer a further decline in long-term interest rates, such as on government and corporate bonds and on mortgages.

How? Most likely by reprising their 2009 program of creating money out of thin air to buy Treasury and mortgage-backed bonds in the open market.

Yet even if the Fed were to succeed in pulling long-term interest rates lower, the question is whether it would make a difference in the economy.

"I don't see a big benefit," said Joe Carson, head of economic research at money manager AllianceBernstein in New York. "I don't think the price of credit is the issue."

Job creation, he said, is about "confidence in the outlook." And to that end, lower rates could even backfire by fueling renewed pessimism about the economy's trajectory, if consumers, executives and business owners see a Fed shift as a desperation move.

Just a few months ago the Fed wasn't expecting to face a call for easier money. The recovery had momentum after the V-shaped rebound in the second half of 2009 from the devastating recession. By April the talk had turned to potential inflation pressures.

Now it's clear that the momentum has faded. The economy is growing, but it has slowed markedly in recent months.

Consumers' confidence level has declined since May, and their spending has decelerated. An index of manufacturing activity has fallen for three straight months, though it's still signaling expansion.

Wall Street optimists say this is a normal slowdown after a brisk initial rebound. That might be fine — except for the dismal state of the labor market.

On Friday, the government said the economy lost a net 131,000 jobs in July as temporary U.S. census workers were dismissed. More disheartening was that the private sector created only a net 71,000 jobs in the month. And the private-sector figure for June was revised down to 31,000 from 83,000.

At this rate of hiring there is little hope of making much more of a dent in the national unemployment rate, which remained stuck at 9.5%.

In testimony before Congress in late July, Fed Chairman Ben S. Bernanke said that the central bank considered the economic outlook to be "unusually uncertain," citing in part the "slow recovery in the labor market."

Bernanke also said that the Fed would "remain prepared to take further policy actions as needed" to protect the economy. Yet he stressed in his testimony that "we're not prepared to take any specific steps in the near term, particularly since we're still also evaluating the recovery, the strength of the recovery."

This week, however, some worried Fed policymakers signaled the possibility of reviving the central bank's purchases of mortgage-backed bonds and/or U.S. Treasury bonds.

The Fed, recall, late in 2008 committed to buying $500 billion of mortgage securities for its own portfolio. In March 2009 it raised its mortgage-bond purchase commitment to $1.25 trillion, and launched a separate program to buy $300 billion of Treasury securities.

One key goal of both programs was to put downward pressure on long-term interest rates to help the battered economy, and specifically to help the housing market. The concept of trying to influence interest rates via direct bond purchases is known as "quantitative easing" — or QE for short.

There's no way to precisely quantify how much lower long-term interest rates were in 2009 because of the Fed's massive bond purchases, which ended in March of this year. But the programs obviously helped restrain rates.

Now, with the economy losing steam, some Fed officials have said publicly that bond purchases could be restarted on a smaller scale. The idea would be to use the proceeds from maturing bonds in the Fed's giant portfolio to buy more debt, rather than simply allowing the portfolio to continue to run off.

After Friday's jobs report, the Treasury bond market saw a new Fed push as a virtual certainty: The two-year Treasury note yield ended the week at a record-low 0.49%, down from 0.55% a week earlier.

The 10-year T-note yield, a benchmark for mortgage rates, tumbled Friday to a 15-month low of 2.82% from 2.91% on Thursday and nearly 4% in early April.

"We expect the [Fed] to respond to renewed upward pressure on the unemployment rate with another round of unconventional monetary easing," Goldman, Sachs & Co. economists said in a report Friday. "These measures could involve more asset purchases — probably Treasury securities," they said.

But some Fed-watchers think that a decision to resume bond purchases on a limited scale would be a mistake. Lou Crandall, economist at Wrightson ICAP in Jersey City, N.J., said it would amount to "empty symbolism" that would damage the central bank's credibility.

And does the Fed really need to do more with interest rates if the economy is just muddling through rather than falling off a cliff?

Another decline in rates would help the same groups that already have no trouble borrowing — Fortune 500 companies, for example, the U.S. Treasury and two-income families with high credit scores and ample assets.

Yet lower mortgage rates wouldn't do anything for people who desperately want to refinance their current home loans but have no equity in their houses.

"The bang for the buck is low" in cutting rates further, said Ethan Harris, head of North American economics at Bank of America Merrill Lynch.

On the other side of the ledger, falling bond yields mean the horde of investors clamoring to buy fixed-income securities are locking in at even less attractive interest rates.

AllianceBernstein's Carson offers another reason the Fed should think twice about pushing rates lower: It could trigger a steep new sell-off in the dollar, which has been sliding against its major rival currencies since early June.

The weaker greenback has been good for U.S. exporters. But another decline in interest rates risks whipping up an anti-dollar frenzy that could frighten global investors — including the Chinese, who hold more than $1 trillion in Treasury securities.

"I would be very worried about negative reaction in the currency market," Carson said. On Friday the dollar lost ground, though there was no panic selling.

Last, there's this: Anything the Fed does to suggest that the economy needs more help could just reinforce pessimism and give businesses another reason to go slow in hiring and spending money.

Indeed, there's an argument that modestly raising short-term rates could do more to spur the recovery than hurt it, by signaling that the emergency that required near-zero rates has passed.

The Fed isn't going to make that move any time soon. But just holding the line at this point might be a better strategy than rewarding borrowers who don't really need the Fed's help.

tom.petruno@latimes.com

Copyright © 2010, Los Angeles Times

[brent217]

Re: A very telling consumer sentiment analysis

Any graph wizards able to show that first chart modified by Shadowstat's inflation numbers, so we can see what credit has been doing in real terms in the last 30 years?

[we_are_toast]

Re: A very telling consumer sentiment analysis



Durable good consumption up $80B from bottom.



Non Durables up about $200B.



Personal Income up about $450B.



Credit Card usage, down $160B

Consumers have about $450B to spend from the bottom, they bought $280B worth of stuff, and payed down their credit cards by $160B. Instead of growing the economy with additional debt, they're buying what they need and paying down the debt. How do you get back to the old days when their attitudes have changed like this?

I have to say I'm a bit suspicious of the PI numbers. How does PI get back to pre-recession levels with 7 million more unemployed and millions more underemployed? Unless those GS bonuses are bigger than we thought.

[phanatic]

Re: A very telling consumer sentiment analysis

I have to say I'm a bit suspicious of the PI numbers. How does PI get back to pre-recession levels with 7 million more unemployed and millions more underemployed? Unless those GS bonuses are bigger than we thought.

I'm sure the finance industries bonuses are a part of it, after all finance is about 40% of the economy so it would only take an increase of 10% of finance salaries to account for the 4% rise in PI assuming everything is equal (which it's not). I'm guessing the increased salaries of our beloved politicians and other government employees that have been hired over the last 2 years is what's making up the difference.

[reggie]

Re: A very telling consumer sentiment analysis

Consumer Sentiment Metric

How can I validate their analysis? When attempting to find out how they roll-up their figures, the weighting of their data, and their sampling approach, I found this in the FAQ of their website:

Most people are aware that their behavior in the internet is captured and used to provide targeted ads and suggest products that may interest them. We mine similar tracking databases to monitor anonymous macroeconomic tendencies within each of our defined sectors on a daily basis. Our analytical methodologies have been developed and refined over time, and they remain the proprietary core of our business. Unfortunately, we must keep the precise details of our sampling process confidential to protect both the integrity of our methodologies and the security of our data

http://www.consumerindexes.com/faqs.html#FAQ008

Do we know who funds or is behind consumerindexes.com?

Consumer Metrics Institute, Inc.,
14405 W. Colfax Ave., #192,
Lakewood, CO 80401-3206

[Rajiv]

Re: A very telling consumer sentiment analysis

Do we know who funds or is behind consumerindexes.com?

From Barry Ritholtz - Will Consumer Demand Falter in Q2 ?

Consumer Metrics Institute is a (relatively) new econometric data and research firm.

What makes them so interesting to me is that they are not economists — they are simply number geeks trying to analyze U.S. consumer data in real-time. The goal is to uncover macro-economic trends by using different data then everyone else.

Rick Davis runs the place. He is a physicist enamored with what numbers say — and he is less than impressed with what the economics profession does:

My real gripes with the established economists are their lack of innovation. The lags and revisions in their data drive me crazy. There are enormous amounts of real-time data available that hardly anyone knows how to analyze. Our current problem is that we are so far ahead of the traditional data sources that hardly anyone takes us seriously.

[Rajiv]

Re: A very telling consumer sentiment analysis

See also - Rick Davis Goes Inside the GDP Report

How Can Rick Davis Project 2nd Qtr GDP at -1.5%? This is a MUST Read, Listen, Learn!!

If the American consumer represents 70% of our economy, shouldn’t economists study consumer spending as much as possible? Well, one individual, and he is not a trained economist,–he is actually a physicist by trade– has done and is doing just that. Who is this visionary? Richard C. Davis of the Consumer Metrics Institute.

I hosted Richard on my radio show, No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Rick Davis, last evening. If you have any interest in the economy (and if the economy is even peripherally linked to the markets), you MUST listen to this interview. Those who follow my work know I am not one taken to hyperbole, but last evening’s show was as good as it gets in terms of cutting edge analysis on the economy focused specifically on the consumer.

What does Richard Davis and the Consumer Metrics Institute do that is so special? The institute promotes itself as:

“Bringing the measurements of critical economic activities into the twenty-first century by mining tracking data for an understanding of what American consumers were doing yesterday.”

How does the Consumer Metrics Institute analyze consumer spending literally yesterday and the day before that? They focus on internet-related purchases of discretionary, durable goods across ten major segments of our economy. Yes, folks, this data is the ultimate ‘canary in the coal mine.’ (STICK with ME….!!)

While the entire interview is a must listen, the 6-minute ‘knock your socks off’ clip starting at the 44:00 minute mark is mandatory (an audio player is provided below). Please allow me to provide my own edited version of this segment, in which I am discussing with Richard how government analysts and economic academicians have problems in sourcing and studying data to project GDP.

RD: There’s a problem with the lag in getting the info. The second problem they have, they’re looking at production (LD’s edit: as opposed to the CMI’s focus on real-time consumption) which is way downstream. We think what’s happening in the economy isn’t necessarily what’s happening at factories.

LD: So, you’re way upstream with the consumer?

RD: We’re way upstream with the consumer. It’s going to take some time for the impact of the consumer to flow downstream to production.

LD: In layman’s terms, what you just told me is you’re ahead of the curve or you’re ahead of the academicians or the government analysts in measuring GDP.

RD: Yes. Just by virtue of where we’re sampling. We’re sampling upstream and we’re getting daily data. It takes us two days to authenticate and validate, not a month, and we’re measuring on a daily basis.

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%. (LD’s edit: That’s -1.5% 2nd quarter GDP, boys and girls!!)

LD: Really!!??

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!

LD: You’re invited back to No Quarter Radio’s Sense on Cents with LD whenever you want.

RD: The reality is, as we look at the data there were two bursts of consumer activity that occurred to trigger the recovery, although this is a jobless recovery which, in my mind, most consumers and most citizens would consider a jobless recovery an oxymoron. There is no such thing. Given that we have this thing that the Fed is convinced is a recovery, it’s all the spin. We saw consumers do two things. We saw consumers spend more in Christmas 2008 relative to a year earlier, although it was barely noticed, and they spent again starting in March 2009, but that peaked in August. Since then it’s been basically downhill.

LD: Wow. That’s amazing insight.

[dummass]

Re: A very telling consumer sentiment analysis

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%. (LD’s edit: That’s -1.5% 2nd quarter GDP, boys and girls!!)

Second Quarter GDP came in at 2.4% for now. If you back out inventory build, maybe 1.6%? It could get revised down next quarter, but -1.5% from 2.4% would be one hell of a revision.

RD: 1st quarter GDP, we would guess, is going to be about 2.5%.

First quarter GDP was revised down to 2.7%, which is damn close to his 2.5% forecast.

[reggie]

Re: A very telling consumer sentiment analysis

Perhaps Davis is credible, and perhaps Consumer Metrics Institute's methods are credible, but if they are unwilling to reveal their model and their sample methodologies, I'm not sure how they can expect to gain credibility. Davis is supposedly a physicist, right? I've never heard of a credible physicist unwilling to show their work - citing confidentiality. To me at least, this is just beyond bizarre. At least let some credible reviewers conduct a peer review under confidentiality. Am I missing something here?

On Edit: Found this video interview of Richard Davis.

Richard C. Davis Reveals Real Consumer Sentiment from David Fry on Vimeo.

[ThePythonicCow]

Re: A very telling consumer sentiment analysis

Perhaps Davis is credible, and perhaps Consumer Metrics Institute's methods are credible, but if they are unwilling to reveal their model and their sample methodologies, I'm not sure how they can expect to gain credibility.

You insinuate that they don't have and can't expect to gain credibility, without actually saying so, right?. Insinuations with plausible deniability ("I didn't say that!") are sometimes better suited for casting doubt than for supporting further productive discourse.

Davis is supposedly a physicist, right? I've never heard of a credible physicist unwilling to show their work - citing confidentiality.

That's a lame objection in my view. Physicists when doing open academic research usually show their results once they go public, yes. That Davis may have been a physicist at some prior point in his career doesn't mean he's doing open academic research in physics now. Rather obviously, he isn't.

[reggie]

Re: A very telling consumer sentiment analysis

You insinuate that they don't have and can't expect to gain credibility, without actually saying so, right?. Insinuations with plausible deniability ("I didn't say that!") are sometimes better suited for casting doubt than for supporting further productive discourse.

Them gaining credibility AND not showing their work is what really frightens me.

Personally, I'm not ready to buy into black box systems where unknown inputs create trusted outputs.

That's a lame objection in my view. Physicists when doing open academic research usually show their results once they go public, yes. That Davis may have been a physicist at some prior point in his career doesn't mean he's doing open academic research in physics now. Rather obviously, he isn't.

But don't the same principles apply, namely, that by releasing their model they facilitate structured peer review and through the rigors of this process gain credibility for the approach?

[ThePythonicCow]

Re: A very telling consumer sentiment analysis

Them gaining credibility AND not showing their work is what really frightens me.

I could understand you not putting much weight on their reports for this reason, but "really frightens" ??? That seems like a tad overly paranoid to me.

But don't the same principles apply, namely, that by releasing their model they facilitate structured peer review and through the rigors of this process gain credibility for the approach?

Perhaps, perhaps not.

[Rajiv]

Re: A very telling consumer sentiment analysis

Consumer metrics seems to base GDP on consumer behavior. Historically, consumer spending has been highly correlated with GDP. Changes in consumer spending have predicted GDP changes over the last two to three decades.

But I believe that the correlation is breaking down. My thinking is that the difference between consumer metric prediction and actual GDP is because of Government spending. So even though consumer spending and consumer sentiment is going down, GDP is not following suit, because of Government spending.

From the BEA release

Real federal government consumption expenditures and gross investment increased 9.2 percent
in the second quarter, compared with an increase of 1.8 percent in the first. National defense increased 7.4 percent, compared with an increase of 0.4 percent. Nondefense increased 13.0 percent, compared with an increase of 5.0 percent. Real state and local government consumption expenditures and gross investment increased 1.3 percent, in contrast to a decrease of 3.8 percent.

That government spending had to go somewhere -- some of it went into personal consumption

Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first. Durable goods increased 7.5 percent, compared with an increase of 8.8 percent. Nondurable goods increased 1.6 percent, compared with an increase of 4.2 percent. Services increased 0.8 percent, compared with an increase of 0.1 percent.