A Lot of Proxies

When detailed statistics might be missing (or a long-time coming), sophisticated investors and savvy economic analysts often look at indirect measurements. “Scientists often talk of ‘proxies’: you measure one thing to get an indication of another. In this case, the proxies for shopping activity are cars parked outside shopping malls--visible in satellite photos from Remote Sensing Metrics. Fully 35% of parking spots have been filled since the middle of September this year; that figure was just 31% and 32% in the previous two years. On the Saturday before Black Friday [i.e., Nov. 20^th] this year, 42.3% of parking spots were filled, versus just 36.5% in 2009 and 30.6% in 2008… Translation: the alien's-eye view of the economy looks good this year.

“Sometimes, however, clogged parking lots don't necessarily translate into higher retail sales. In 2008, for instance, there were a lot of customers elbowing each other at the shopping malls--but the actual amount of money spent was less than in year prior, since the busted economy had forced retailers to slash prices.” FastCompany.com, November 24^th. Were the proxies accurate? What were the actual numbers?

The November 27^th Los Angeles Times fills in the blanks (talking about Black Friday the days leading up to it): “It was a record day for spending, with consumers buying $10.69 billion worth of merchandise at brick-and-mortar stores, a 0.3% rise over last year, according to ShopperTrak RCT Corp., a research firm that monitors spending at more than 50,000 retail stores. Foot traffic was up 2.2%... Although the sales increase -- which does not include online spending -- was not as strong as many industry watchers had expected, ShopperTrak noted that earlier-than-ever deals this year drove many shoppers to the malls well before Black Friday… That meant some unexpected strength in early November that may have thinned business on the day after Thanksgiving: Sales and traffic for the first two weeks of the month through Nov. 13 increased 6.1% and 6.2%, respectively, versus the same two weeks in 2009, ShopperTrak said.”

It’s interesting to note a few other such proxies and, importantly, who uses them. In a September 9, 2009 CNBC interview, for example, Warren Buffett provided one of his secret “backdoor” measurements on economic viability. Buffett responded to interviewer Becky Quick’s question that if he were stranded in the desert and had to look at one economic indicator, what would it be? “I would probably look at, perhaps, freight car loadings and perhaps trucks,” answers Buffett after reminding her he looks at “everything.” Warren’s no fool; the American Railroad Association issues a weekly report, according to blogger Mark Perry, that measures “a) the number of rail carloads, b) inter-modal rail traffic (the number of trailers and containers), and c) 19 different carload commodity groups (including grains, lumber, chemicals, minerals, paper, and metals). The likely reason that Buffett is so fond of rail traffic as his ‘desert island indicator’ is that it measures the amount of raw materials, inputs, and supplies moving around the country every week, and this should accurately predict the future direction of the overall economy. After all, the inputs transported by rail eventually get processed into inventory, final output, and goods for sale.”

Balance of trade issues are susceptible to tracking through the number of containers crossing international shipping lanes, and it no surprise to learn that those huge containers tend to be shipped full to the United States and frequently empty back to China. Refrigerated containers suggest foodstuffs, as another more subtle index. Here in Southern California, the ports of Long Beach and Los Angeles, like most major harbor terminals, will not only track the number of containers, but their relative size; the maritime standard is based on an accounting tracking system that uses twenty feet as the economic equivalent of one container, so numbers of containers, regardless of actual size, are “averaged” to this maritime unit.

Economists aren’t the only researchers that use such indirect metrics. Wikipedia provides this example from the scientific community: “Quantitative research may involve the use of proxies as stand-ins for other quantities that cannot be directly measured. Tree-ring width, for example, is considered a reliable proxy of ambient environmental conditions such as the warmth of growing seasons or amount of rainfall. Although scientists cannot directly measure the temperature of past years, tree-ring width and other climate proxies have been used to provide a semi-quantitative record of average temperature in the Northern Hemisphere back to 1000 A.D.”

So as consumer confidence is the underpinning of increased consumer demand, all eyes are on indicators of betterment (or not). But what exactly do consumers use in their own personal evaluation analysis as to when things are looking good enough to spend more… obviously assuming we are looking that these “feelings” most probably from folks who still have jobs and income flow. Ask yourself what signs make you feel a bit more like spending, and if you feel like it, let us know.

I’m Peter Dekom, and even people who aren’t Tea Party members read tea leaves.