Consumer Confidence Is a Lagging Indicator: Expect Post-Recession Gloom Through 2010

Scott Grannis:

I've never paid much attention to surveys of confidence, mainly because they tend to be lagging indicators. As these charts show (one appears above), consumers are often quite happy until just before a recession starts, and quite depressed well after a recovery begins.

Brian Wesbury and Bob Stein:

Meanwhile, the Conference Board’s measure of consumer confidence fell to 47.7 in October from 53.4 in September, as consumers’ assessment of the present situation dropped to the lowest level since 1983. It is not unusual for this measure to bottom after a recession is over and we are more pleased by evidence of actual spending increases than we are dismayed by consumers claiming discontent.

Exhibit A:

"Whining" hardly captures the extent of the gloom Americans feel about the current downturn. The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost millions of jobs during the slump, U.S. consumers have fallen into their deepest funk in years. "Never in my adult life have I heard more deep-seated feelings of concern," says Howard Allen, retired chairman of Southern California Edison. "Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble." Says University of Michigan economist Paul McCracken: "This is more than just a recession in the conventional sense. What has happened has put the fear of God into people."

Exhibit B:

If America's economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many polls reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as "suspended animation" and "never-never land."

Both excerpts above are from Time Magazine (altered slightly) articles written AFTER the July 1990 - March 1991 recession had ended, the first was from January 13, 1992 (ten months after the recession) and the second from September 28, 1992 (21 months following the recession). As the circled area on Scott's chart above indicates, consumer confidence remained low for two years following the end of the 1990-1991 recession and it took about three years for consumer confidence to rise to the pre-recession level. The circled pattern following the 2001 recession was similar.

Bottom Line: Even though there is general consensus that the recession ended this summer (probably in June), consumer confidence will likely remain choppy and low through next year, and we'll get reports like these Time Magazine articles about how bad everything is for at least another year as well.

Comments

[socrateaz]

Remember : Consensus is usually what most agree with. And the crowd is usually wrong! I have been through those other recessions. And I saw more fear for things I considered minor during and afterwards. I believe (note this is not science) that the overall reasons for optimism is belief in policies which can not be good for the economy overall. The socialist believe that all other social experiments failed because of some flaw in their situation. This time they have it right! No this time they had more already in place base. The result will be the same. Just take longer to see the result! Hitler's socialism was probably the most successful in history. It depended on Fascism. to exist. Leaders are human. And power begets more power until the abuse of such power becomes obvious. Over the next few years, the real damage or help to the economy will be revealed. Be optimistic! But be realistic too!

2009 Oct 29 05:11 AM

[Denis Gould]

Albert Edwards at Socgen has just published a piece suggesting that leading indicators and analysts earnings estimates are rolling over. Albert is a long term bear but is very convincing. The correlating up of all markets in a kind of a dollar carry trade mode in the last few days is worrying

2009 Oct 29 05:21 AM

[LilBob]

We also need to remember that there is "consumer confidence"-what we hope to achieve once this recession is over; and then there is "less than rational gadget-crazed consumption euphoria"-what we had at the height of the sub-prime wealth delusion.

We also know that consumers are deleveraging, and (although this is purely anecdotal-from personal conversations) I've heard quite a few individuals lately lamenting how much they'd spent in the last several years and professing a determination to pay off their credit cards and start using mostly cash-reserving the credit card for buying plane tickets or floating car repairs and such over a few paychecks.

2009 Oct 29 06:28 AM

[Dave Wrixon]

We have all heard the Lagging Indicator Theories, but how about telling us what the hell is actually going to drive this recover, other than more debt?

2009 Oct 29 06:45 AM

[David Van Knapp]

Consumer confidence surveys are part of the "news flow" that influences investor sentiment and stock prices. So although they may be lagging indicators vis a vis the economy, they can (and do) have current effects on stock prices. (Those effects may be short-lived, as yesterday's headline becomes today's "old news," already priced in according to EMT afficionados).

BTW, it is misleading in your graph to indicate with the color bar that the current recesssion is over. Recessions are dated, by near-unanimous agreement, by the NBER, which has not declared this one to be over yet. If all the other color bars in your chart are NBER-defined recessions, then the current one should be too, for consistency and honesty.

2009 Oct 29 11:12 AM

[inthemoney]

Consumer confidence and unemployement only become lagging indicators when they stop declining and stabilize, until then they are leading indicators.

2009 Oct 29 03:00 PM

[thiazole]

That isn't true. Show me some charts that back up that statement. Consumer confidence is just an all around poor indicator - it can be coincident, but it often lags (just look at the last recession). Unemployment leads recessions, but lags recoveries - how badly it lags the recovery is determined by the shape of the recovery. The more V shaped, the less it lags (I'd give this as a rough rule of thumb - if the unemployment rate starts decreasing within 6 months of the end of a recession, it is a V; 6 months to 1 year is a U; greater than 1 year is an L).

To the author, I like the quoted articles. It expresses 2 points that I've tried to make so many times on this forum.

1. People think every recession is the "worst since the depression" when they are feeling it themselves. I remember the same kind of talk during the 2001 recession, which in hindsight barely even qualified as a recession. When it is all said and done, this recession will be "one" of the nastiest since the Great Depression and will be compared to 1937 and 1974.

2. People usually think we are in a recession LONG after it has ended. Remember John Kerry talking about how we were still in a recession during the 2004 election campaign? I do. And a lot of people bought into it, too (and although it took the NBER a REALLY long time before they finally announced the end of the 2001 recession, they had already announced it before that election - they announced that the official end of the recession was late 2001, but they didn't announce it until 2003).

The good news is that the NBER won't take as long to announce the end of this recession. This recovery is sharp enough that after the 4th quarter GDP data comes out, the NBER will likely announce that the recession ended somewhere between June and August 2009. After 2001, growth was very weak for a couple years. It took years before we saw the kind of quarterly growth numbers that we just got.


On Oct 29 03:00 PM inthemoney wrote:

> Consumer confidence and unemployement only become lagging indicators
> when they stop declining and stabilize, until then they are leading
> indicators.

2009 Oct 29 03:58 PM

[Russ Wetherill]

Yes, consumer confidence is low during the recovery from recession, but it's also low during the recession itself. And who are these "economists" anyway, and how about sharing their analysis and not just their conclusions.

'Experts' say... that the Sun revolves around the Earth. That's nice. Are they right? I don't know - let's see their analysis.

Did these soi-dissant experts arrive at their economic conclusion based on a stimulus or a non-stimulus economy? What defines a recovery vs. stagnation or decline? So many questions, so few answers.

It seems like these 'economists' can say just about anything without ever answering for their bad predictions. Where were they in 2006?

2009 Oct 29 04:10 PM

[thiazole]

And what would you require to admit that we are in the recovery phase? I find that most skeptics have no idea how to answer that question (or they answer it with metrics like unemployment which have always been poor predictors of recovery).


On Oct 29 04:10 PM Russ Wetherill wrote:

> Yes, consumer confidence is low during the recovery from recession,
> but it's also low during the recession itself. And who are these
> "economists" anyway, and how about sharing their analysis and not
> just their conclusions.
>
> 'Experts' say... that the Sun revolves around the Earth. That's nice.
> Are they right? I don't know - let's see their analysis.
>
> Did these soi-dissant experts arrive at their economic conclusion
> based on a stimulus or a non-stimulus economy? What defines a recovery
> vs. stagnation or decline? So many questions, so few answers. <br/>
>
> It seems like these 'economists' can say just about anything without
> ever answering for their bad predictions. Where were they in 2006?

2009 Oct 29 05:53 PM

[Jason Rines (iThinkBig)]

Mark Perry, your economic reporting in 2008 was wrong. Your assessment that the depression is ending is wrong too. Commodities rose in 1935-1937 crushing the consumer further even while GDP appeared to rise. That is why there will be a double dip which search here reveals I had called for since fall of 2008 and REPEATEDLY. I care about the guy on the street Mark. You are an incompetent bufoon. I alone stopped in here to tell you that.

2009 Oct 29 08:12 PM

[thiazole]

Interestingly, I noticed that the St. Louis Fed is no longer shading past the second quarter either: research.stlouisfed.or.../


On Oct 29 11:12 AM David Van Knapp wrote:

> BTW, it is misleading in your graph to indicate with the color bar
> that the current recesssion is over. Recessions are dated, by near-unanimous
> agreement, by the NBER, which has not declared this one to be over
> yet. If all the other color bars in your chart are NBER-defined recessions,
> then the current one should be too, for consistency and honesty.

2009 Oct 30 12:13 PM

[Russ Wetherill]

Take off the training wheels. If the economy can stand without government support, then that would constitute recovery - real recovery. Until then, how will anyone know? Time will tell. A few quarters of 3.5% growth AFTER the governmental fiscal and monetary stimulus end will be very compelling, even to me. But we aren't there just yet...

I think it's fair to say that we have recovered from last fall's financial collapse, but that does not mean that all of our problems are behind us.

We still have trillions of dollars of bad loans that have yet to be dealt with, growing public debt, record private debt, more jobs lost than created, and lower paying jobs replacing higher paying jobs.

Facts are stubborn things. Unemployment is such a fact, like it or not. More unemployed deals a double blow to governmental coffers since less revenue in the form of tax receipts flows in and more expenses are incurred by sending out unemployment checks. No economic recovery, real or imagined, can be sustained with rising unemployment.

And it's not just the quantity but also the quality of jobs. Jobs must be created that maximize the highest skill level of each worker. We can't all work in fast food and afford $300k houses in LA. Can we?


On Oct 29 05:53 PM thiazole wrote:

> And what would you require to admit that we are in the recovery phase?
> I find that most skeptics have no idea how to answer that question
> (or they answer it with metrics like unemployment which have always
> been poor predictors of recovery).

2009 Nov 01 01:15 AM