by Doug Short & Steven Hansen
Econintersect is inconsistent in reporting the Conference Board Consumer Confidence – sometimes as a news brief, sometimes in analysis – and at times just skips it. It is a minor consumer confidence index with which many analysts have fallen out of love.
This month, Econintersect will provide a little more depth of perspective on the data as this consumer index too is in recession territory. The commentary below is contradictory in places, which points out there are many legitimate ways to look at the data.
The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through August 18th. The 44.5 reading is significantly below the consensus estimate of 52.0, reported by Briefing.com, and a sharp decline from the July downward revision to 59.2 (from 59.5).
Here is an excerpt from the Conference Board report:
Says Lynn Franco, Director of The Conference Board Consumer Research Center: “Consumer confidence deteriorated sharply in August, as consumers grew significantly more pessimistic about the short-term outlook. The index is now at its lowest level in more than two years (April 2009, 40.8). A contributing factor may have been the debt ceiling discussions since the decline in confidence was well underway before the S&P downgrade. Consumers’ assessment of current conditions, on the other hand, posted only a modest decline as employment conditions continue to suppress confidence.”
Consumers’ appraisal of present-day conditions weakened further in August. Consumers claiming business conditions are “bad” increased to 40.6 percent from 38.7 percent, while those claiming business conditions are “good” inched up to 13.7 percent from 13.5 percent. Consumers’ assessment of employment conditions was more pessimistic than last month. Those claiming jobs are “hard to get” increased to 49.1 percent from 44.8 percent, while those stating jobs are “plentiful” declined to 4.7 percent from 5.1 percent.
Consumers’ short-term outlook deteriorated sharply in August. Those expecting business conditions to improve over the next six months decreased to 11.8 percent from 17.9 percent, while those expecting business conditions to worsen surged to 24.6 percent from 16.1 percent. Consumers were also more pessimistic about the outlook for the job market. Those anticipating more jobs in the months ahead decreased to 11.4 percent from 16.9 percent, while those expecting fewer jobs increased to 31.5 percent from 22.2 percent. The proportion of consumers anticipating an increase in their incomes declined to 14.3 percent from 15.9 percent.
Below the Headlines:
Let’s take a step back and put Lynn Franco’s interpretation in a larger perspective. The table here shows the average consumer confidence levels for each of the five recessions during the history of this data series, which dates from June 1977. The latest number is above the bottom of the unprecedented trough in 2008, but it is far below the average confidence level of recessions a full 27 months after the end of the Great Recession (based on the official call of the National Bureau of Economic Research). In fact the only lower readings in the history of this survey were in the 2007-09 recession. No month in prior recessions was this low.
The graph above is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end recessions have been highlighted and GDP data included. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing indicator of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today’s reading of 44.5 is dramatically below the 83.0 of the current regression level (46.4% below, to be precise).
It is interesting that the consumer confidence pattern of the past 27 months following the NBER declared end to the recession is similar to the 36-month pattern following the 1990-1991 recession, although the current pattern has so far been at a lower confidence level. At an even higher level, there was also a two year period following the 2001 recession where confidence lagged. A common factor in all three cases is a “jobless recovery”. To a great extent Consumer Confidence is a proxy for unemployment problems.
On a percentile basis, the latest reading is at the 1st percentile of all the monthly readings since the start of this data series in June 1977 and at the zero percentile of all the non-recessionary months. Only six months in the entire history of this indicator, all during the Financial Crisis, have been lower than the August number.
Are We Talking Ourselves Into a Recession?:
Christopher Rupkey of the Bank of Tokyo – Mitsuibishi UFG has argued in today’s Financial Market Weekly release we are talking ourselves into a recession.
Trying to answer if we can talk ourselves into a recession is difficult because negative readings on consumer sentiment and confidence do not always mean a reduction in spending. There are 109 million Americans with private sector jobs and they do not always perceive correctly what is taking place in the economy. The Conference Board surveys whether people think jobs are hard to get each month. What has happened after recent recessions is that those saying jobs are hard to get stays at elevated levels for a long time even as the economy is creating large numbers of new jobs. The economy so far this year has created 0.930 million jobs, a 1.59 million annual rate, and yet 44.1% surveyed said jobs were hard to get.
……recessions do not come along that often. It can take years before imbalances build up in the economy that can bring it back down, imbalances like overbuilding or a tight labor market pushing up inflation in good times that the Fed would need to address with rate hikes. The economy expanded for 6 years and one month before the peak of activity prior to the 2007-09 recession. The economy expanded 10 years before the 2001 recession and 7 years and 8 months before the 1990-91 recession. It may be harder for negative psychology to bring on a recession that we think. If a recession were to begin in say September 2011, the expansion from the end of the 2007-09 recession would be just 3 years and 3 months… not too likely historically speaking.
As consumer confidence has never left recession territory since the Great Recession, it is hard to determine what it is indicating. In addition, Econintersect is not a fan of consumer confidence surveys as they are a rear view mirror.
On the other hand, poor consumer confidence is becoming endemic. Even when conditions improve somewhat, it is likely the consumer will continue to see a glass half empty. The Christopher Rupkey argument is a good example. Admittedly, jobs growth is terrible – but sentiment remains at levels seen when the economy was losing jobs at the rate of 5 million per year – and 1.9 million jobs have actually been added to the non-farms payrolls in the past 18 months. The problem is, of course, that less than 20% of the jobs needed have been created.
If consumer confidence is correct, consumers are already hunkered down in recession mode. How much more could consumers contract at this point?