Sinking Consumer Confidence

From Bloomberg:

Confidence among U.S. consumers unexpectedly dropped in November as the loss of jobs threatened to undermine the biggest part of the economy.

The Reuters/University of Michigan preliminary sentiment index decreased to a three-month low of 66 from 70.6 in October…

Rising joblessness puts the economy at risk of slipping into a vicious circle of firings and declines in consumer spending that will limit the emerging recovery.

I don’t pay as much attention to consumer confidence as I do to some other economic data because I have yet to see enough statistically significant correlations between confidence and future economic paths. However, I do realize there is a connection having recently posited the following about a term I coined unemployment rate illusion:

behavior changes in accordance with the nominal numbers used as economic signposts in an economy…

The parallel of money illusion to unemployment rate illusion is that a higher posted rate of unemployment can have a serious negative impact on consumer confidence and personal consumption (think balance sheet recession). All else being equal, higher unemployment rates mean lower confidence and consumption…

If people see 12-13% in 2010, they will be floored, angry, and looking for someone to blame. As Democrats control Washington, they will get the lion’s share of the blame and lose big time in 2010.

Making matters worse, this is the kind of shock that causes people to put their checkbooks away and go home for the night a.k.a sending us into a double dip recession.

So I am concerned that we are going to see a relapse. (Note: I have moved from seeing a double dip recession as a 1/3 chance to a base case scenario). My optimism about recovery is now fading.

Unfortunately, similar downbeat confidence numbers are also coming from the Conference Board index which unexpectedly fell in October:

The Consumer Confidence Index, released by The Conference Board, sank unexpectedly to 47.7 in October — its second-lowest reading since May.

Forecasters predicted a higher reading of 53.1. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

The index has seesawed since reaching a historic low of 25.3 in February and climbed to 53.4 in September.

The connection to markets comes again via David Rosenberg from this past October 29th who I seem to be quoting a lot recently. In reference to the Conference Board numbers, Rosenberg said (highlighting added):

So many people are deluding themselves that we have some sort of durable recovery on our hands and yet consumer confidence, at 47.7 in October, is unbelievable — the lowest this every got in the 2001 recession, which included the 9-11 terrorist attacks, was 84.9. Think about that for a second. If the equity market is catching on to the view that we could be in for some slowing in the data, then a significant correction after a 60% surge is very likely. This is a time to be raising cash if you haven’t done so already — valuation, technicals, fund flows and fundamentals at this juncture are all near-term obstacles.

Comments

[Dialectical...:]

Many people have been making the case for a W recession since last spring. I have always seen that as the likely shape. Yet all the real world data has been V shaped. My head still says that we will see a double dip and that the markets will respond to this by falling at some point (I have been saying it will be this winter). Yet the only thing that seems to matter is the near zero cost of money. It's open bar on Wall Street and it will take a lot of bad news to put a damper on the party (apparently).

Whether trader sentiment EVER catch up with consumer sentiment is the question.

Nov 16 01:34 AM

[bbro:]

Job growth is coming in 2 to 3 months.....then consumer sentiment
will pick up....The conference board Employment Trends index turned up in September has a lead time of 2 to 4 months....

Nov 16 06:55 AM

[DavidC:]

Most actions to date appear to have been based on two premises, 1) that with enough stimulus there will be a return to 'normalcy', i.e. the stock markets back at the levels of the last two bubbles, namely tech and housing, and 2) that we've been in a common-or-garden recession rather than in a structurally changing environment.

Neither of these is correct.

With interest rates in the US and the UK at HISTORIC lows (the UK's base rate is now lower than it was when the Bank of England was first started 300-odd years ago), with the massive amount of money being pumped into the system (although if all the main protagonists are doing so it just becomes a game of relativity) and with the stock market just acting as an inverse proxy for the dollar index, there is absolutely nothing that suggests we are on the road to recovery.

It also bemuses me to read of all the metrics that are still touted as gospel, the worst being 'unemployment is a lagging indicator'. This may have been true for the bull market of the last 50 years but there is no reason at all for it not to be a leading indicator if we are into a structural bear market (which I believe to be the case).

Rant over.

Nov 16 07:05 AM

[bbro:]

It amuses me when someone thinks they can call a paradigm shift....

Nov 16 07:08 AM

[test213:]

Yes, the latest data show that consumer confidence is sinking. But tha is a volatile indicator, as mood swings based on news can influence consumer behavior.

test213
admin at invetrics.com

Nov 16 07:11 AM

[davidbdc:]

Well, yes consumers are correctly very nervous in general. I am too. We watch our politicians sell us out, we watch Wall Street bankers responsible for a severe recession get their million dollar paychecks while assembly workers in Ohio get their pink slips, we watch our deficit spin totally out of control, etc, etc.

But lets not overstate the case. We still have a strong work force, we have lots of entrepreneurs, we have strong companies ready to bounce back. People should be spending less money, reducing their debt, and building up savings. Those savings get invested eventually and that spurs additional economic growth and opportunity. We basically had 5 years of "fake" economic growth based on liar loans, home equity loans, etc.....and that will take a while to work its way out of the system.

People like to do stuff, they will become optimistic much more quickly than they became pessimistic. If we want to be pessimistic about something it should be those schmucks in Congress that can't add and subtract and think they should be running our lives.

Maybe its just Monday morning optimism but I think that if we can put enough pressure on our idiot Congress to balance the budget that things are going to start to turn around for the better.

Nov 16 07:23 AM

[DavidC:]

bbro, "It amuses me when someone thinks they can call a paradigm shift...."

I don't know what stance you have. I'm not calling a paradigm shift, I'm stating it as it is. UK and US interest rates are at all time historic lows, personal credit has been maxed out (and that maxing out was, as well as credit cards, was also down to using property as a an ATM) and the consumer (still?) represents around 70% of GDP. Do you REALLY think that pumping money into the system, to get us back to what is idiotically called 'normalcy', is going to change that?

Watch a chart of the dollar index and the Dow or S & P in real time - the stock market index is just acting as an inverse of the dollar index.

Read Chris Martenson, Zerohedge, Karl Denninger, John Mauldin and other people for the FACTS, not optimism or spin.

You can reply as you will, I won't be making any further comments on this post.

DavidC

Nov 16 07:49 AM