My Discussions with President Rick Davis of CMI About Consumer Metrics Daily Growth Index VS BEA GDP‏

Rick Davis,
 
Thank you for your reply with some discussions of CMI index.  By using your index to predict the Q2/2010 BEA GDP, I expect 1.6% contraction but BEA report it as 1.7% expansion.  When looking through your methodology I believe your index still an excellent gauge for down stream economic activity and have the following comments:
1. Your index compares the consumer behavior with one year ago while BEA compares the economic activity with one year ago.  So the index you tracked and the GDP# BEA reported strongly depend on the situation one year ago.  There could have inventory reduction a year ago that make BEA# easier to compare with and your index just doesn’t track.  So I introduce the following equation which should have higher degree approximation than the direct reading from your index to forecast GDP by smoothing the inventory effect one year ago:
CMI(n) + CMI(n+1) = BEA(n) + BEA(n+1) – Inventory adjustment at n+1
where CMI(t) is the forecasted GDP from your index at time t, and BEA(t) is the real GDP# as reported by BEA at time t, n is the time in year.
2. Let’s return to the Q2 BEA report, I noticed that your index forecast the Q2/2009 GDP around 2%(I do not have your raw data and just zoom in and read from your graph) while the real one is -0.8%.  And your index predicts the Q2/2010 GDP should be -1.6%. Then
2% + (-1.6%) = -0.8% + BEA(Q2/2010) – Inventory adjustment at Q2/2010
BEA(Q2/2010) = 1.2% + Inventory adjustment at Q2/2010 = 1.2% + 0.8% = 2.0%
Close enough to the 1.7% BEA reported
3. Your index tracks consumer behavior on BIG ITEMs which are better correlated to US production activity while the BEA’s report on consumer growth includes consumer product consumption which contributes a lot to the trade deficit. So your index actually track the C+(X-M).  In Q2/2010, this part contributes to -2.0% to GDP while your index predicts -1.6%, close enough.
 
Thanks,
Hui Zhong

The Reply From Dr. Rick Davis – President of Consumer Metric Institute

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