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.
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 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, 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.
Consumers in uncharted waters
Source: Conference Board, Bureau of Economic Analysis, Merrill Lynch.
U.S. Michigan Consumer Sentiment Index Falls in June
Bloomberg, June 27 2008
Consumer Confidence Plummets
KELLY EVANS and ANTON TROIANOVSKI
June 25, 2008; Page A1
Consumers Wary Over Economy, Reports Indicate
MICHAEL M. GRYNBAUM
NYT, June 25, 2008
The Fed is walking a tightrope between inflation and a recession, hoping to find its way to neutral. Bill Gross, of PIMCO, shares their insight.
"There’s a lot of stress in the
financial markets. Let’s face it, this economy, the US economy and
even the global economy is delevering, and when an economy delevers there are
substantial problems and substantial risks.
"We’ve seen a lot of that. We’ve
seen writeoffs in the hundreds of billions of dollars with more to come. But
yeah, there’s a lot of tenuous action in the financial markets these days and I
expect more of it."
Gross: Fed Will Hold Steady for Rest of Year
CNBC.com | 25 Jun 2008 | 03:20 PM ET