Consumption Contraction Approaches 2008 Low

| September 2, 2010

We continue to monitor the sharp decline in the Growth Index (GI) tracked by the Consumer Metrics Institute (CMI), and the monthly average rate of change of this measure of real-time consumption is now approaching the low of late 2008.

Even more distressing than the plunge in the monthly average is the magnitude and duration of the contraction as defined by the annualized quarterly growth rate. The red line on the graph below represents the consumption contraction that accompanied the 2008 recession and the blue line tracks the current decline.

While the 2008 contraction fell sharply before bottoming after about 100 days, the current contraction has been characterized by a persistent downtrend that is now 230 days old and shows no signs of bottoming as of yet. The CMI believes that the extreme nature of the current decline suggests that either the recession from 2007 is still in progress or the imminent “second dip” will be more pronounced than its predecessor.

“There probably hasn’t been two separate recessions in three years, simply one that has evolved in significant ways. But if this really is a ‘double dip’ recession, then our data indicates that the ‘Great Recession’ of 2008 was merely the precursor, and not the main event. It is this current dip that we should be really concerned about; the current contraction in consumer demand is about structural changes in consumer behavior, whereas the ‘first dip’ was about short term loss of consumer confidence.

This recession has been complex and constantly evolving in ways that policy makers have not been able to understand through their low resolution lenses. As a consequence their policy responses have been misguided, ineffective and wasteful. The Federal Reserve may be able to save the banking system by being the ‘lender of last resort’, but it is powerless to change perhaps the one thing that John Maynard Keynes got right — and what he mischaracterized as a ‘Paradox of Thrift’ — as over 100 million U.S. households become economic ‘loose cannons’, acting exclusively in their own best interests in 100 million different ways.”

If the CMI is correct, risk assets like stocks will likely suffer material losses over the next 12 to 24 months as the secular bear market from 2000 continues its long-term campaign of real value destruction.

Category: Commentary, Market Update

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