Consumer Contraction Now Exceeds the Great Recession

On October 20, 2010 the aggregate severity of the 2010 contraction in consumer demand surpassed the similar measure of economic pain experienced during the “Great Recession.” And a glance at our “Contraction Watch” tells us that the pain is not about to end anytime soon:

(Click on chart for fuller resolution)

In the above chart, the day-by-day courses of the 2008 and 2010 contractions are plotted in a superimposed manner, with the plots aligned on the left margin at the first day during each event that our Daily Growth Index went negative. The plots then progress day-by-day to the right, tracing out the changes in the daily rate of contraction in consumer demand for the two events.

The true severity of any contraction event is the area between the “zero” axis in the above chart and the line being traced out by the daily contraction values. By that measure the “Great Recession of 2008” had a total of 793 percentage-days of contraction over the course of 221 days, whereas the current 2010 contraction has reached 820 percentage-days over the course of 282 days — without yet clearly forming a bottom. The damage to the economy is already 3% worse than in 2008, and the 2010 contraction has lasted 28% longer than the entire 2008 event without yet starting to recover.

We have constructed a new chart to assist in the visualization of the “percentage-days” severity of the two contraction events:

(Click on chart for fuller resolution)

In the above chart the red vertical bar represents the -793 percentage-days of contraction in consumer demand that we measured in 2008. The blue vertical bar represents the same measure (to date) for the 2010 event. But since the 2010 event is not yet over, we have projected the eventual full extent of the 2010 event with the purple vertical bar. That projection is an average of several recovery scenarios, all of which conservatively assume that the bottom has already been reached.

Meanwhile, we are left to wonder if a bottom as been forming in the current contraction. A detailed view of our Daily Growth Index over the past 60 days could be viewed as either encouraging or simply “more of the same,” depending on your state of mind:

(Click on chart for fuller resolution)

It is important to remember that our Daily Growth Index is a moving 91-day “trailing quarter” average for our Weighted Composite Index (converted from a nominal base-100 index into a year-over-year percentage change). As such it responds to the values of both the newest day’s Weighted Composite Index (just entering the 91-day average for the first time) and the 92nd day back — which has just fallen out of the average. The current values of the Weighted Composite Index are in the -5% to -7% range, whereas the oldest days falling out of the average reflect a weaker period in late July when the Weighted Composite Index was in the -6% to -9% range. Even if current consumer demand remains relatively constant we should expect the trailing 91-day “trailing quarter” to improve slightly from recent record lows over the next 30 days. But we are unlikely to see significant improvements until the current values of the Weighted Composite Index move substantially above the zone between 94 and 96 — which we consider unlikely until after the mid-term elections (seeĀ Political “FUD” and the Consumer Psyche for why we consider that unlikely).

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