Last month I wrote about the collapse in consumer confidence and its link to the economy. Unfortunately, despite the recent evidence that the consumer was out in force spending from savings rather than income, the plunge in consumer confidence is rather concerning. Particularly at a time when Americans are growing increasingly worried about a weak job market, higher costs for food and clothing and recent stock market turmoil, the falling confidence numbers raise new concerns about their willingness to spend which is vital to economic recovery. As we have shown in past missives consumer spending accounts for 70 percent of U.S. economic activity.
The Conference Board stated that “Consumer confidence deteriorated sharply in August, as consumers grew significantly more pessimistic about the short-term outlook.” which is probably an understatement considering that its Consumer Confidence Index fell to 44.5, down from a revised 59.2 in July. The number was the lowest level since April 2009 when the reading was 40.8. It also is far below the 53.3 that analysts had expected. A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth. As you can see in the chart above we have a long way to go to get back to those levels.
While the conference board stated that there were a number of factors contributed to the index’s decline such as the downgrade of the U.S. federal debt and revived concerns about the health of European banks; the reality is that the majority of American’s do not follow these economic/financial events closely and are responding in the survey as to how they FEEL about their current and future situations. Americans are plagued by economic worries such as keeping their job if they have one, threats of termination or layoffs, rising costs of food and energy matched against stagnant wage growth and home values remain weak. As a result, one gauge of the index that measures how shoppers feel about the economy dropped to 33.3 from 35.7. Another measure that assesses shoppers’ outlook over the next six months fell to 51.9, down from 74.9 last month.
Consumers’ views on jobs, in particular, have become more pessimistic. Those claiming that 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. 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 dropped to 14.3 percent from 15.9 percent.
Well, despite the hopes and prayers of mainstream economists, the Federal Reserve and the media for an economic recovery by the end of the year, the consumer has pretty much been crushed into oblivion. While the mainstream media was touting the rise in consumer spending as well as the expansion of consumer credit. These are NOT good numbers. The average American is struggling to make ends meet and with wages declining on year over year basis, food and gas consuming more the 20% of those wages it is no wonder that they have been turning to credit cards and withdrawing savings to fill the deficit. Retail sales are up but not because the consumer was buying flat screen televisions, rather, it was gasoline sales and energy costs to cool their homes from one of the hottest months on record temperature wise.
Stay focused – this data tells us a lot about the state of the consumer and the economy. In the coming months it will be critical for the trends to reverse or our prediction of a recession in 2012 will become more of a reality.