No GDP Growth or Spending:
Consumers Remain Trepidatious
Wednesday, July 27th, 2011
By George Leong, B.Comm. for Profit Confidential
When consumers are cautious, they tend to hold back on any major purchases such as homes, vehicles, furniture, appliances, and travel, to list a few. This will impact spending and gross domestic product (GDP) growth and the ability of companies to expand their businesses and hire. This is my concern and I feel that continued nervousness among consumers will impact GDP.
Consumer Confidence in July was another disappointment, with a reading of 59.5. The reading was above the estimate of 56 and the revised 57.6 in June, but it was below the 60.8 reading in May. The reading is the lowest since October 2010.
To tell you how bad the readings are, economists feel that a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession level of 90. In my economic analysis, the situation is not good.
Moreover, add in the fact that theU.S.housing market is in a double-dip recession after prices declined to below the lows of 2006 and you’ll understand my concerns going forward.
To drive the economy, consumers need to spend. We have historically low interest rates and quantitative easing. It is working, but not as fast as I would like to see.
The government can use fiscal policies, but with $14.2 trillion in national debt and at its ceiling, looking for an increase in the debt level, we are just adding more debt to American taxpayers’ load. Plus, spending more doesn’t mean consumers will join in.
The Durable Goods Orders reading for June will be reported on July 27, with estimates calling for a 0.5% increase in the ex-transportation reading, below the revised 0.7% in May. Some economists are also expecting a possible negative reading in durable goods. These are not necessarily readings you can get excited about.
A strong housing market is also critical, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening; home prices continue to decline, dragged down by continued high foreclosures and short sales, in which homes are dumped below the mortgage value. New home sales for June came in at 312,000, below the estimate of 320,000 and the revised 315,000 in May.
Also consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers the confidence to assume a mortgage and not worry about losing jobs and missing payments. The non-farm payrolls are due out next Friday and I’m not confident.
At the end of the day, we need to see confidence and the willingness to spend and not worry about money. Only under this scenario will there be sustained spending and economic growth. Unfortunately, there is little reason for us to get excited about at this juncture.
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Tags: consumer confidence, economic analyis, economic slowdown, GDP growth, national debt, non-farm payrolls, quantitative easing, U.S. housing market, US Economy updates
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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.
