Consumer confidence sinking
Courtesy of Edward Harrison at Credit Writedowns
Confidence among U.S. consumers unexpectedly dropped in November as the loss of jobs threatened to undermine the biggest part of the economy.
The Reuters/University of Michigan preliminary sentiment index decreased to a three-month low of 66 from 70.6 in October…
Rising joblessness puts the economy at risk of slipping into a vicious circle of firings and declines in consumer spending that will limit the emerging recovery.
I don’t pay as much attention to consumer confidence as I do to some other economic data because I have yet to see enough statistically significant correlations between confidence and future economic paths. However, I do realize there is a connection having recently posited the following about a term I coined unemployment rate illusion:
behavior changes in accordance with the nominal numbers used as economic signposts in an economy…
The parallel of money illusion to unemployment rate illusion is that a higher posted rate of unemployment can have a serious negative impact on consumer confidence and personal consumption (think balance sheet recession). All else being equal, higher unemployment rates mean lower confidence and consumption…
- If people see 12-13% in 2010, they will be floored, angry, and looking for someone to blame. As Democrats control Washington, they will get the lion’s share of the blame and lose big time in 2010.
- Making matters worse, this is the kind of shock that causes people to put their checkbooks away and go home for the night a.k.a sending us into a double dip recession.
So I am concerned that we are going to se a relapse. (Note: I have moved from seeing a double dip recession as a 1/3 chance to a base case scenario). My optimism about recovery is now fading.
Unfortunately, similar downbeat confidence numbers are also coming from the Conference Board index which unexpectedly fell in October:
The Consumer Confidence Index, released by The Conference Board, sank unexpectedly to 47.7 in October — its second-lowest reading since May.
Forecasters predicted a higher reading of 53.1. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.
The index has seesawed since reaching a historic low of 25.3 in February and climbed to 53.4 in September.
The connection to markets comes again via David Rosenberg from this past October 29th who I seem to be quoting a lot recently. In reference to the Conference Board numbers, Rosenberg said (highlighting added):
So many people are deluding themselves that we have some sort of durable recovery on our hands and yet consumer confidence, at 47.7 in October, is unbelievable — the lowest this every got in the 2001 recession, which included the 9-11 terrorist attacks, was 84.9. Think about that for a second. If the equity market is catching on to the view that we could be in for some slowing in the data, then a significant correction after a 60% surge is very likely. This is a time to be raising cash if you haven’t done so already — valuation, technicals, fund flows and fundamentals at this juncture are all near-term obstacles.
