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.
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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