Pushing Economic Confidence Buttons

The Conference Board Consumer Confidence Index® retreated in September. The Index now stands at 48.5 (1985=100).    Think of it – the index is half of its initial value when President Ronald Reagan was at mid-term.   Other consumer confidence surveys convey similar declines.

Until the Great Recession, despite falling consumer confidence – consumers continued their spending spree.  It is now likely that even a rising consumer confidence may not improve consumer spending significantly.

I was struck by a comment by reader Demand Side who stated in part: “….it seems to me the uninformed lay person has a leg up on the economist trained in rational expectations, market efficiency, monetarism, and the other main theories of the past twenty-five years.”

There does not seem to be a real correlation of consumer confidence to any metric over extended period of time.   If I isolate the periods between 1990 and 2000, they roughly follow Presidential approval levels – but if examined over longer periods this relationship becomes mirky.  It is a romantic thought that Joe Sixpack has a sixth sense about the economy.

Economists and Presidents expend effort to pump perceptions of the economy.   One of President Obama’s initial errors was to bad talk the economy – and the equities market reacted accordingly.   Leadership is unable to be candid about the economy.   Data needs to be spun.

Even the economic analysis pumped out by the investing industry is spun to the point that the reader’s understanding is distorted.   It might be that the population which does not read or listen to news might have a better understanding of economic conditions than those that listen to the news.  Do the higher educated let distorted data override observation?

This week Econintersect issued a recession watch.  There has been a significant collapse of the pulse points monitored in the last 30 days.  This collapse matches the characteristics of the lead in to the 2001 and 2007 recessions.  A recession watch is called when a recession is possible.

This recession watch was a difficult decision for John Lounsbury and myself.  We had only released this index 20 days before, and did not expect a collapse in the underlying data.   Worrisome is the context of this collapse – the stimulus did not stimulate.  Historically I can find no comparable situation to analyze.  Analysis is in uncharted territory.

ECRI’s forward indicator (WLI) improved this week to -7.8% from -8.7% – still indicating the future will be worse than today economically as the index remains in recession territory.

In an August 2010 report, the Congressional Budget Office (CBO) detailed the expected economic boost of the stimulus (expressed as annualized GDP growth percentages):

Year                           Low Stimulus Estimate        High Stimulus Estimate

2009                                          0.9                                           1.8

2010                                          1.5                                            4.1

2011                                           0.7                                            2.3

2012                                           0.2                                           0.5

Using these CBO projections with 2Q2010 GDP at 1.7% growth, then the economy without stimulus was growing / contracting between 0.2% to -2.4% in the second quarter.  A reminder of how rapidly the spending curve of the stimulus was going to fall off, here is a portion of a Washington Post pictorial we saw during the passage of the stimulus.

The actual spending of course is slightly different but the graphic provides a good feel of how the spending is tailing off.   For this reason, even though there is slow and steady growth in consumer spending, the contraction of stimulus spending is faster creating this recession risk.

Literally we may already be in Great Recession 2.0 – or it may be possible we never left the Great Recession as it was wallpapered with stimulus and monetary policy.

Economic Releases this Week:

Moderately good news this week is the continuing trend to the lower range of initial unemployment claims.  The four week moving average has remained in a range between 450,000 and 490,000 so far in 2010 – a range that historically implies no real jobs growth.

The US Census released August 2010 construction data showing a 0.4% improvement MoM and -10% YoY – but below the 2Q2010 average construction values.  As August data is below the 2Q2010 average, this an indication of GDP contraction in 3Q2010 for the contribution of construction spending to GDP.

Summary of Analysis of this weeks Economic Releases – for detail please follow the hyperlinks:

Headline Analysis
ISM Manufacturing Survey Growth Slowing Growth Slowing
Personal Income and Expenditures August 2010 Up 0.2% MoM chained dollars Little per capita income growth
Chicago ISM Up Sharply Opinion contradicted by hard data
2Q2010 GDP 1.70% Data trends point to lower 3Q2010 growth
Case-Shiller Home Prices July 2010 unadjusted prices up Mostly likely future trend down
CFNAI August 2010 -0.53 trend towards recession territory

Bank Failures this Week: Electronic Game Card

Bank Failures this Week:

2 replies on “Pushing Economic Confidence Buttons”

  1. In the “slowdown” vein and further verification of your “recession watch”, note that the Consumer metrics index (CMI) has started to rollover and that their 91-day “growth index” has fallen below the depths plumbed in the 2008 contraction. The 91-day index now stands at -6.09%. The index should have a close correlation to GDP (with a 1-2 quarter delay) as shown on their website. The 2010 CMI contraction is now destined to be worse, maybe by far, than the 2008 event.

  2. Old Rick – I follow this index also but we do not use it in our economic forecast. It is hard to tell at this point how things will shake out – but it does not appear yet to be suggesting any more than an mild leg down. In our case, the data has not yet gone negative. the killer is the backward data revisions, which are not commonly discussed in the media, took us by surprise magnifying the evidence of economic contraction.

Comments are closed.