Every day we are bludgeoned with a variety of economic reports from various government agencies about the state of the economy. Most of these reports have some form or another of “seasonal adjustments”, speculations, estimations or just flat out “guesses” about what is going on in the economy. What we tend to find out over time is that these numbers are generally overly optimistic during recessionary periods as we are in today.
Today, we are going to look at three different polls from the Gallup organization on consumer spending, the economy and employment. The Gallup organization has studied human nature and behavior for more than 75 years and focus on what people “think and feel” about various issues. They employ many of the world’s leading scientists in management, economics, psychology, and sociology, and other consultants to identify and monitor behavior.
The key difference between Gallup and the various government agencies is that these polls are direct questionnaires to individuals and the responses are tallied and reported. There are no adjustments, assumptions, guesses, etc. In the famous words of Bill Clinton; “What is…is.”
So, with that in mind, let’s start by taking a look at the consumer spending poll. In the recent 3rd quarter GDP report we saw the personal consumption expenditures made up a very large portion of the increase in GDP. While the media trumpeted the consumption as a return of the consumer the reality was it was spent on utilities and healthcare rather than “other” types of consumption.
This clearly shows up in the consumption spending of average Americans that were polled by Gallup. The consumer spending poll tracks the average dollar amount Americans reported spending or charging on a daily basis NOT COUNTING the purchase of a home, auto or normal household bills. Therefore, this survey strips out the spending on utilities and focuses on the actual purchases of “stuff” that drives final demand for businesses. As you can see there has been virtually no movement in the index since the recession took hold in the U.S. which is indicative of their attitudes that we never left a recession to start with.
More importantly, the index was at 81 at the beginning of July when 3rd Quarter GDP started and ended the 3rd Quarter period at 59. So, while GDP reported a surge in Personal Consumption Expenditures (PCE) in the first “ESTIMATE” of 3rd quarter GDP; the Gallup survey of consumer’s actual spending patterns DECLINED by 27% during the same period.
Not surprisingly, employment plays a big factor in consumer spending. If the consumer is unemployed or underemployed they tend to have less money to spend. Therefore, this shows up in consumer spending patterns. While the Bureau of Labor Statistics does a lot of estimating with seasonal factors and “birth/death adjustments” when reporting employment and unemployment in the U.S.; the Gallup survey simply asks individuals in they are under-or unemployed.
Gallup’s U.S. employment measures report the percentage of U.S. adults in the workforce, ages 18 and older, who are underemployed and unemployed, without seasonal adjustment. “Underemployed” respondents are employed part time, but want to work full time, or they are unemployed. “Unemployed” respondents are those within the underemployed group who are not employed, even for one hour a week, but are available and looking for work. Results for each 30-day rolling average are based on telephone interviews with approximately 30,000 adults. The BLS report includes individuals that are 16 years and older and uses seasonal adjustments for comparison.
While the number of those directly unemployed has fallen from the peak of when this poll was began at 11% to 8.5% today the number of individuals that are underemployed has fairly stagnant and close to its peak of just over 20%. The recent decline in the percentage of unemployed does confirm the recent slight upticks in hiring seen in the recent employment reports. However, it also shows that a lot of that hiring may be occurring in areas that are part time or lower paying wage jobs as shown by the larger uptick in the “underemployed” status recently.
Regardless, the levels of unemployment and underemployment are high, and while recent improvements are encouraging, any economic shocks could send these numbers higher in a hurry. Notice the spikes in both reports early in 2011 as the economy was struggling through a very weak patch. With the “super committee” now effectively out of commission and automatic spending cuts looming that will subtract from GDP growth, international worries and a potential recession in the next year there are plenty of catalysts to send workers back to the unemployment line. This leads us to the confidence in the economy as a whole.
Gallup’s economic confidence survey which is the combined responses to two questions: 1) rate the economic condition of the country today, and; 2) is the economic condition getting better or worse, really ties into consumers employment status and their ability to live. The chart compares the results of the economic confidence survey to the S&P 500. What is important to note is that economic confidence is closely tied to the performance of the S&P 500.
This was “The Bernank’s” direct remarks when launching QE 2 in 2010 when we said that by targeting asset prices it would boost consumer confidence. He was correct. As the market rallied consumers expectations about the economy improved but unfortunately their ability to consume didn’t improve along with it.
However, there is another way to look at this chart. The economic survey has tended to be a leading indicator of the economy as a whole and the markets. The last time that the survey had declined to these levels the economy was mired in a deep recession BUT the market was still near its highs. As we have discussed in recent missives on the economy, and as confirmed by the ECRI, we are likely in, or about to be in, a recession. If that analysis is correct then the economic survey may be confirming the same which means the stock market has some catching up to do.
It’s All About The Consumer
While we watch the almost daily deluge of government reports that the media focuses on from one minute to the next it is important not to forget that it really all revolves around the consumer and primarily the small businesses that make up the bulk of hiring in the country. With real incomes declining, debt burdens stripping cash flows, home values falling, international turmoil, domestic political infighting and concerns about keeping a job if they have one, or finding one if they don’t, there are not a lot of positive inputs to spur a strong consumer driven recovery. This lack of demand by the consumer is also why small businesses have no appetite for obtaining credit, increasing production or expansion of hiring beyond absolute necessity.
So, while “Rome burns” and our government “fiddles” while warring amongst itself over what policies to enact, where to cut spending or how to increase revenues it is important to remember that there are “real” people affected by the decisions made and actions taken. This is why I find the Gallup polls interesting – it is the voice of the “average American” ringing through and it is only a shame that our leaders aren’t listening.