With the release of the Conference Board’s consumer confidence survey this morning, we find that the index ticked down slightly in March to 70.2 from 71.6 in February. While the media sloughed off the decline by pointing to the increase in the present situation component, which rose to 51 from 46.4, what was less widely discussed was the decline in future expectations about the economy, which fell from 88.4 to 83.
While the month-to-month numbers tend to get the media all excited, or depressed depending on the direction of movement, the reality is that consumer confidence still wanes at very depressed and recessionary levels. Even after reported increases in employment, a 30% rise in the stock market, and a perceived solving of the Eurozone crisis, confidence has only reached the same point that it was at this time last year just before the Japanese earthquake and tsunami.
Have you wondered what really drives consumer confidence? The answer is simple. Jobs.
If consumers are to be confident about their future, they need to feel secure in the present and future employment. The chart shows (gold bar) the confidence gap, which is the difference between the present situation index and the future expectations index. The red and blue lines are the number of individuals surveyed who feel that jobs are currently hard to get or plentiful.
When confidence is high, so are the number of people who feel that jobs are plentiful. This is generally because they are currently employed and feel like they could get another job if they wanted one. The opposite is true today. This gap between jobs being hard to get and plentiful has closed slightly in the last couple of years; however, we are a long way from getting back to levels that are more normally associated with recoveries.
This gap has a spiral effect on the economy. When consumers feel like jobs are hard to get, they spend less or move down the discount ladder. In turn this decline in demand keeps businesses on the defensive and keeps them from hiring. In order for business to move items, they are having to resort to heavy discounting or incentives, which keeps pressure on profit margins. If there are increases in short-term demand, businesses either work current employees for longer hours, with relatively no increase in pay, OR they hire temporary help. With a large and available labor pool to draw from, the competition for jobs suppresses wage levels. While wages have remained stagnant, or declined, consumers are strained by the rising cost of energy and food, which reduces their ability to consume at a level that sufficiently increases end demand. Wash, rise and repeat.
This cycle is very difficult to break and has frustrated all efforts by the government to stimulate both real employment and the economy. While Ben Bernanke still feels that accommodative policies that stimulate the stock market will improve employment, evidence to date proves the contrary.
If you want to know what will drive employment, just ask a business owner. A recent survey by the Dallas Fed found that the single most important item to creating jobs were “sales”. This is the same issue that the NFIB has brought forth repeatedly in the small business survey: “poor sales” is the number one concern of small businesses today.
The reality is that until consumers have deleveraged their balance sheets at home, consumption is likely to remain depressed far longer than most economists expect. While more rounds of liquidity injections by the Fed could certainly drive the stock market to historically high levels, it will be to the ire of Main Street as consumers suffer the fate of commensurate increases in energy and food costs that sap their ability to make ends meet.
Maybe its just me, or maybe it’s time to try a different experiment.