Friday, August 12, 2011

Consumer confidence collapse is overstated

According to the University of Michigan's measure of consumer confidence, consumers today are more rattled about the state of the economy than they were at the depths of the "great recession" two and a half years ago. If that's not sentiment hyperbole, I don't know what is. The state of the economy is manifestly better now than it was then, but the bad news has been hyped to the max, as this survey suggests.

Start with Nancy Pelosi's claim that Republicans and Tea Partiers were bent on destroying the world as we know it. Add in the threat of default by countries such as Greece and Italy and perhaps Spain, which could in turn trigger the collapse of the entire European banking industry and possibly bring about the end of Western civilization. Spice things up with soaring gold prices and a Fed that has resorted to extraordinary measures to ease the supply of credit, while the background chorus wails that we're on the verge of another housing price collapse. Austrian economists meanwhile insist that we ain't seen nothin' yet. Top things off with the first-ever downgrade of U.S. Treasury debt, and a president who seems clueless about what to do as his approval ratings sink.

In short, if you wanted to work yourself into a frenzy of dread, there is no shortage of bad news with which to do it. But you have to ignore a whole lot of good news in the process. For starters: the economy has been growing for two years, adding some 2 million jobs; unemployment claims this year have averaged 415K per week, down over one-third from the levels two years ago; retail sales are at record highs, up 8.5% in the past year; corporate profits are at record nominal and real highs; swap spreads (a key measure of systemic risk and the health of the banking system) are at normal levels today when at the end of 2008 they were signaling potential calamity; and high-yield credit spreads (see chart below) have fallen by two-thirds from their recession highs, when as many as half the companies in the U.S. were expected to be out of business within five years. Let me simply suggest that the facts do not support the angst reflected in today's confidence report.


RichmondG30 said...

Some analysts are saying that today's conditions are analogous to the early Spring of 2008 when the Bear Sterns collapse preceded the crisis by six months.

What remains to be seen is whether a default by a Greece or Ireland leads to a domino effect that brings down the European, and by extension the American, banks or whether global growth resumes fairly quickly. This may postpone the crisis long enough to begin to unwind the massive mountains of sovereign debt and unsustainable social welfare states that did the reckless borrowing.

That is the $64,000 question.

Benjamin Cole said...

I applaud Scott Grannis' sober analysis.

BTW, the USA cannot default on its debts. It can print money.

What S&P is thinking is beyond me--unless they are saying there is a chance the Tea Party would force a default by refusing to raise the debt ceiling.

Frozen in the North said...


You can like an index or hate an index, but you cannot decide when its real and when its fake. If you choose to dismiss consumer confidence as BS fine, but you have to reject the whole lot.

Unless there are errors in the calculation; it is what it is. The other issue that you dismiss is that Europe was not in trouble, that there was not two years of high unemployment and finally there was not also two years of complete paralysis. Maybe that's why consumer are giving up the ghost

Benjamin Cole said...

BTW: The time to buy is when everybody says the world is ending, and how terrible everything is. That suggests now is the time to buy.

When investors are exulting about Pax Americana and nothing but blue skies into the coming century, then sell.

That said, I worry investor have become incredibly wimpified. You want problems? How about the Cuban Missile Crisis, when it was 50/50 we would get nuked?

WWII? Vietnam? Urban riots in the streets (1960-70s) Rising crime, making urban areas iffy (1960-80s)?

The Soviet menace? Double -digit-inflation (1970s)? Barry Manilow (fading)?
90 percent top tax rate (1940-60s)? 70 percent top tax rate (1970s)?

Now, we have low top tax rates, whole industries have been deregged (finance, airline, transportation, telephones) and our sole remaining military threat has collapsed (the Soviets).

Young people seem very business oriented, which was not the case when I went to school in the 1960s-70s.

Really, the wimpiness of today's business and investor class is perhaps the biggest threat to America, and a dithering Fed.

Cabodog said...

Read this article and you'll be left saying "what recession?"

This about says it all about consumer confidence.

A few highlights (this is not recession or pre-recession consumer behavior):

If you're looking for signs of a double-dip recession, you won't find them in Nordstrom's bottom line.

The Seattle-based retailer posted a second-quarter profit that blew past Wall Street's predictions Thursday, sparking a late-afternoon rally in its stock price.

Chief Financial Officer Mike Koppel said Nordstrom was able to sell a steady stream of new merchandise without marking down prices more than planned.

"We continue to see strong regular-price selling," Koppel said. "This was the case during our Anniversary Sale," as well as Nordstrom's semiannual sales for men and women, when regular-price selling outpaced clearance sales.

Kurt said...

@Frozen: I don't need to speak for Scott, but I did not see anywhere in his article where he called the Consumer Confidence Index fake (nor anything about liking or hating the index). As I read it, he takes the index at face value, i.e. an expression of the *feelings* of the typical consumer. He's just saying that the degree of negative sentiment at this time is unwarranted based on the facts and rational analysis. That doesn't make the index fake.

septizoniom said...