Throughout the summer, we’ve heard about declining consumer confidence (AKA, sentiment). The conclusion typically drawn is that low consumer confidence now likely means low consumer spending ahead. Until recently, warnings have been sounded about weak winter holiday sales.
Now, however, consumer confidence readings are creeping back, and retail sales are actually looking good. How should we interpret these moves? And how should we view those low, summer levels?
The answer is twofold.
First, the economy is gaining strength again.
Double-dip recession fears are starting to be dismissed as numerous economic indicators show growth. Even perennial worriers like The New York Times are changing their tune: “U.S. Economy Picks Up Pace, Averting a Stall.” Hardly high-five optimism, but certainly a positive change from the “global gloom” reporting this summer. From the article, here is an example of the change afoot:
"It ain’t brilliant, but at least it’s heading in the right direction,” said Ian Shepherdson, the chief United States economist for High Frequency Economics, a data analysis firm. “I want to see 4 percent [GDP annual growth rate], but given that people were talking about a new recession, I’ll take 2.5 or 3.”
Second, consumer confidence (when low) is a contrarian indicator.
When consumer confidence is low, it’s not signaling falling sales. A common belief is that low confidence produces a self-fulfilling forecast of low sales. However, history often shows the opposite.
Below is a graph showing consumer confidence (Reuters/University of Michigan Consumer Sentiment Survey) and consumer spending (Personal Consumption Expenditure). However, it is not the typical plotting of today’s confidence vs. today’s spending. What we want to examine is the predictive powers of the low confidence measures we saw this summer. Therefore, the confidence level is lined up with the change in spending over the following twelve months. By doing this comparison, we can answer the question, “How did spending change following a low confidence measurement?”
click to enlarge
As can be seen, low confidence does not beget low spending. In fact, more often, there is a positive gain from consumers’ glum period.
There is also a contrarian relationship with the stock market.
Low consumer confidence typically reflects a weak economy and associated weak stock market. Therefore, the same opposite signal can exist between low consumer sentiment and a subsequently rising stock market. A recent article, “Low Consumer Confidence Is Bullish For Equities,” provides a good explanation.
The bottom line
If low consumer confidence repeats its contrarian indicator role, we could see retail sales continue to gain nicely in the months ahead. The stock market appears to be forecasting just such a rise.
(Stock chart courtesy of StockCharts.com)
Disclosure: Long U.S. stocks and U.S. stock funds.
