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Consumer Sentiment Drops to 28 Year Low

Posted By Barry Ritholtz On June 27, 2008 @ 11:12 am In Consumer Spending,Inflation,Psychology | Comments Disabled

Sent_um_2 [1]
Confidence among U.S. consumers fell
in the month of June to the lowest level in 28 years. The culprits are record-high energy costs and rising joblessness.

Earlier this week, the Conference Board’s Consumer Confidence data plunged to 16 year lows. The chart at right shows that over the past 5 years, sentiment readings have been rangebound. Despite the war(s), rising prices, weak job creation, Katrina, and an otherwise mediocre post recession recovery, Americans have remained not-all-that-gloomy [2].

That is, until recently.

The most recent peak in sentiment was January 2007, and since then, its been more or less straight down. 2008 saw the prior range broken, to record levels of unhappiness. 

What gives? This must be perplexing to those who look at Inflation and Unemployment data [3] without any context. The numbers seem relatively modest.

For a moment, forget all of the arguments about models and how the BLS measures things, and how thats changed over time. If we have full employment, where is the wage pressure? If Unemployment is so low, why is sentiment so negative? If inflation is contained, why the negative sentiment? Something here doesn’t compute.

We learned today that consumer spending upwards by 0.8% in May. However, that appears to be primarily inflation driven consumption, fed by stimulus checks, and higher food and energy prices. Personal income also rose, gaining 1.9% from April.

The chart below, via Merrill Lynch’s David Rosenberg [4], explains why: Real Personal Expenditures had moved up to a 5+% rate in the 1990s; Now, we are heading in the other direction. Annual changes in Real Personal Consumption is heading downwards. Its not the actual level, but the directional change that is negative. It seems to be following sentiment towards the zero line.

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Consumers in uncharted waters    

Consumer_conf_2 [5]

Source: Conference Board, Bureau of Economic Analysis, Merrill Lynch [4].

Stuckflation [6]

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Sources:
U.S. Michigan Consumer Sentiment Index Falls in June [7]
Bob Willis
Bloomberg, June 27 2008
http://www.bloomberg.com/apps/news?pid=20601068&sid=a0Ta5iRjGUAg&

Consumer Confidence Plummets [8]
KELLY EVANS and ANTON TROIANOVSKI
June 25, 2008; Page A1
http://online.wsj.com/article/SB121431191157999655.html

Consumers Wary Over Economy, Reports Indicate [9]
MICHAEL M. GRYNBAUM
NYT, June 25, 2008
http://www.nytimes.com/2008/06/25/business/25econ.html

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Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2008/06/consumer-sentiment-drops-to-28-year-low/

URLs in this post:

[1] Image: http://www.bloomberg.com/apps/cbuilder?ticker1=CONSSENT:IND

[2] gloomy: http://bigpicture.typepad.com/comments/2008/06/are-we-too-gloo.html

[3] who look at Inflation and Unemployment data: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/17/AR2008061702463.html

[4] Merrill Lynch’s David Rosenberg: https://www.gpcresearch.ml.wallst.com//common/emaillink/pdf.asp?SSS_38AD5F2D949203826FE94EEB09E51957&pdf=pdf/Consumer_confidence_for_the_re.pdf

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/2008/06/27/consumer_conf_2.png

[6] Image: http://bigpicture.typepad.com/photos/uncategorized/2008/06/27/stuckflation.gif

[7] U.S. Michigan Consumer Sentiment Index Falls in June: http://www.bloomberg.com/apps/news?pid=20601068&sid=a0Ta5iRjGUAg&

[8] Consumer Confidence Plummets: http://online.wsj.com/article/SB121431191157999655.html

[9] Consumers Wary Over Economy, Reports Indicate: http://www.nytimes.com/2008/06/25/business/25econ.html

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