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, GDP growth, and the ability of companies to expand their businesses and hire.
Consumer Confidence in May was another disappointment with a reading of 60.8, below the estimate of 66.3 and the revised 66.0 in April. The reading was the lowest since October 2010. To give you a better idea of 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 readings of 90. This cannot be good.
Add in the fact that the U.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 interest rates at historical lows and quantitative easing. It is working, but not as fast as I would like to see.
The government can use fiscal policies, but with over $14.0 trillion in national debt and a massive deficit, major spending increases may not be in the cards.
The Durable Goods Orders reading for April was weak with a 3.6% decline, weaker than the estimate calling for a 2.0% decline and below the 4.4% growth in March. Excluding the transportation element, the decline of 1.5% was also worse than expected.
These are not readings you can get excited about. There continue to be mixed readings.
The monthly retail sales numbers are mixed. Of the 24 retailers reported, 60% fell short of estimates, according to Thomson Reuters. The blame was on the higher gasoline prices and higher basic commodity prices in dairy, cotton, and meat. Consumers have a limited budget and, when expenditures rise in some areas, other areas are negatively impacted.
A strong housing market is important, as homeowners buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales (where homes are dumped below the mortgage value).
Also consider that a key driver of the housing market is the jobs market. We need jobs and security in order to give buyers confidence to assume a mortgage and to prevent them from worrying about job losses and missed payments. The private ADP report was dismal.
At the end of the day, we need to see confidence and the willingness to spend without worrying about money. Only under this scenario will there be sustained spending and economic growth.