Signature Update June 30, 2010 Edition, Volume IV
The Confidence Board released its June 2010 Consumer Confidence Index (NYSE:CCI) June 29th and the results sent the US stock markets into a triple digit decline with the DOW closing below 9,900 on the day. Following three straight months of increases for the CCI, the index decreased from 62.7 in May to 52.9 in June. Surprising? No, the decline in the CCI and its attending reports shouldn’t have come as a surprise to anyone paying attention over the last 6-8 weeks. The only real surprise here is that the market seemed to have been surprised, rather than the market’s lackluster performance of late having already accounted for what the indexes were about to report.
Consider the news the American public has been exposed to over the last two months and see if you can spot the trend. We’ve been hammered with the BP disaster in the Gulf and the ongoing drama over the EU debt crisis. We’re in the middle of a primary election season wherein hopefuls have emphasized how poorly House of Representative members, 1/3rd of the US Senate and the sitting president have done at managing the affairs of the nation. And just to make it more stimulating, we’ve been subject to ongoing weakness in the housing market and just how little stimulation has come from the $787 billion economic stimulus program. It’s no wonder American consumers express less confidence today than they did only a month ago.
In addition to the weakness in the CCI, the Present Situation Index (NYSEARCA:PSI) declined from 29.8 in May to 25.5 in June and the Expectations Index (EI) dropped from 84.6 to 71.2. Together, these figures present a difficult picture for the consumer and suggest that personal incomes and retail spending must be lower; but not so.
Personal incomes rose 1.4% and consumer spending increased .2%; the disparity between the income and spending figures versus the confidence index declines left some economists and policy makers scratching their heads. However, many understand that people act in perfect accordance with what they believe, regardless of what they might say, and the wisest among us have learned that in the long run, it’s more important to be an observer than to take things at face value.
So, what do these seemingly dichotomous reports tell us? Consumers’ comments are mirroring what they’re being presented through media reports, sometimes what they’re hearing around the water cooler or over the fence, and what they think they’re supposed to feel, but they actually have a greater level of optimism than is being reported. Now, this doesn’t mean that consumers will continue to act one way and say something else. In fact, we’re also seeing signs that household savings rates are increasing again, having risen to 4%, reflecting the highest levels seen since September 2009.
What remains to be seen is how consumers will act in the late summer months of August and September as back-to-school buying trends are challenged and new car model orders take center stage for domestic manufacturers. Unemployment rates are likely to impact these figures, just as they’re certain to affect the 2010 mid-term elections in November. Absent a significant and unlikely improvement in both jobs and housing, democrats and incumbents are likely to lose big and the balance of power in the House is likely to shift, leaving Washington gridlocked just as President Obama moves to increase taxes.
Ironically, that may be the best news of the day. The last time the House and presidential administration were at a stalemate was in the final years of the Clinton administration when, aided by low interest rates and an accommodative Federal Reserve, the DOW saw an expansion from the 5,000 level to over 7,000 once the tech bubble burst.
In the meantime, the combined weight of the negative index reports, whether accurately reflective of what consumers actually believe or not, could be enough to slow the current economic recovery or even suppress growth to negative levels. When Treasury Secretary Henry Paulson, Representative Barney Frank, Fed Chairman Ben Bernanke and President George W. Bush took steps to publicly motivate House and Senate members to pass important legislation designed to provide liquidity to an ailing capital market system in the fall of 2008, a significant recession wasn’t certain. But as soon as their press conferences were over and consumers and business leaders had been exposed to the substance of their remarks, a depression became the feared event and a recession almost sounded like good news. In the interim, the only thing that had changed was what was being said and the economic fallout became hard to avoid.
Disclosure: no positions