THE KEY TO THE NEXT RECESSION – THE CONSUMER
By Lance Roberts, CEO, StreetTalk Advisors
Frugality! The is the key word in today’s economic society. Consumers under pressure by rising inflationary costs and lower wages, declining home prices and job worries, political uncertainty and global risks, are more concerned than ever that“something wicked this way comes”. Today’s release of the consumer confidence survey certainly depicts these concerns and realities with the consumer’s assessment of current conditions at its lowest point since December 2010 and one of the lowest readings on record.
The first chart shows all three indexes for comparison. While consumer confidence in regards to the economy has eroded drastically over the last several months dropping 6.6 points to 39.8; consumers attitudes about the current economic environment have plunged back toward the 2009 lows dropping 7 points to 26.3.
However, what is most concerning, and a real thorn in the side of the those expecting an economic recovery in the coming months, is the expectations of economic improvement going forward. This index nosedived 6.4 points to 48.7. This is very concerning for one primary reason. The forward expectations index of the economic environment is closely tied to personal consumption expenditures. Since the economy is 70% driven by consumption the expectations of a weaker economy by consumers doesn’t bode well for increased consumption.
As you can see in the chart the recent sharp decline is most likely indicating weaker consumption ahead and this doesn’t bode well going into the holiday shopping season. Of course, this poor outlook by consumers is not surprising considering that only 11.0 percent described business conditions as good and 43.7 percent, describe conditions as bad.
Furthermore, and not a good sign for holiday spending, there was considerable weakness inincome expectations where only 10.3 percent see their income rising and 19.2%, see their income falling. This inversion in income with pessimists on top is very rare for this series.
Income perception is also crucially important. The only thing separating the U.S. consumer from completely contracting has been the recent and drastic drawdown in personal savings to fund the gap between income and personal living standards. The personal savings rate has dropped from 5.3 percent in June to 4.5 percent currently. This is not surprising given their concern of income weakness and economic risks that are impacting them on the home front.
The chart shows the consumer confidence index overlaid against the INVERSE of the personal savings rate which shows the correlation between confidence and savings. The decline in consumer confidence is indicating a rise in personal savings. Should this occur, that means less fuel to feed the consumption that supports the economy. This doesn’t bode well for retailers as well as the rest of the economy as a whole and also goes directly the “aggregate demand” component the feeds future employment. Maybe this is why the “jobs hard to get” component of the index is running near historic highs at 47.1 percent.
As we head into the fourth quarter we will see the tax credits and tax cut extensions from last December begin to fade. For most those incentives were spent long ago. Therefore, while the market and the analysts all have high hopes we watch as Europe dances around the ropes trying to pull a bailout rabbit from the hat, the U.S. as it flirts with the idea of mortgage bailouts and more Q.E. (highly inflationary) while all the while the consumer is trapped. The daily headlines that permeate the media entrench their fears while they watch incomes stagnate, employment hopes dwindle as layoff intentions rise and food and energy consume more than 22% of their wages and salaries. Really, is anyone surprised that confidence is in the tank?
So, while economists and Wall Street tout the slight bump in Q3 GDP as a clear sign recession has been avoided; the reality is that the consumer may be telling us something quite different.
8 Comments
I am lucky to have survived these last three years. I used to make 60$ an hr as a contractor, now I make 14 doing something far fetched from that.
Actualy bought another house. Who would have thought.
There are allways two sides to a trade.
If you’re really serious, it confirms my view that lenders as well as consumers are still in la-la land. I write Minyanville’s Housing Market Report to tell readers what’s really going on in housing markets around the country.
Did you actually find a lender who would offer you a mortgage even with a decent down payment? Or did you pay with cash? Did you lose your previous house to foreclosure or short sale? Why would you want to buy a house in your financial condition? What’s wrong with renting until you regain a solid financial footing? Or are you under the illusion that housing markets are bottoming? Guess what? They’re not.
Keith,
You should know better, all real estate is local. Mishnr is a contractor, who could have found a good deal based on replacement cost. Maybe he has a renter covering his cost or giving a positive.
To dismiss out of hand without the facts of his particular situation because you write a housing report is a bit much.
There is value to be had buying real estate today. Depends what you pay.
It depends on what you pay, AND what you do with it…
mishnr is a contractor, perhaps with idle tools and knowledge, maybe he can turn into a profit, and hopefully make more than $14/hr for his labor.
I am seeing some bargains here (Seattle area), that would survive another 15% fall in prices, mostly from the banks not wanting to fix it up enough to get current pricing.
As far as banks lending, well, they don’t have to worry that much, since they are all sold off to Fannie, Freddie, FHA, etc. At the right low price, decent credit, and a little down payment, I’m sure that even someone making $14/hr could qualify for a loan.
The banks collect their fees for handling the transaction, and pass the risks on, so they are not delusional.
And I doubt mishnr is either.
And don’t forget: the consumer is also under pressure as a result of falling interest rates. Falling interest rates mean less income as well. Remember: A consumer is a currency user and not an issuer.
Yes, I recall reading a study (sorry I don’t recall where), that stated people were less likely to spend money in an environment of low interest rates, than in an environment of higher interest rates (which completely runs in oppostition to the convential thinking of most central banks).
And if you think about it, it makes sense…if you recall the popular rule of “77″, that is, to take the prevailing interest rate and devide into 77 to get how long it would take to double your savings. So at 11% you double your savings in 7 years…at 1% it takes 77 years to double your money.
People realize that to accumulate savings thay have to save even more (spend less), than they normally would to achive an appreciable level of savings
small correction for the record: it is the rule of 72.
interest rate X years = 72 = doubling.
3% doubles your money in approximately 24 years, 6% in 12 years, 9% in 8 years.
Thanks, Steve !