How Consumers Are Capping Economic Growth
Thursday, June 14th, 2012
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 new employees, according to my market view.
Consumer confidence in May was another disappointment, with a reading of 64.9. This was below the estimate of 69.4 and the downwardly revised 68.7 in April. The reading is at a multi-year low. To tell you how bad the readings are: economists suggest a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. My market view is that it will be some time until the confidence reading heads back towards the pre-recession reading level of 90. This cannot be good.
And, while home building and permits are much improved, the critical home prices continue to fall, which I discussed in Homebuilders Show Improvement, But Stay Selective. The Case-Shiller 20-city Index contracted another 2.6% in March, following a 3.5% decline in February. Lower home values translate into less home wealth and less desire to spend until the situation improves, based on my market view. A strong housing market is important in many ways; for example, homeowners 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 where homes are dumped at prices below mortgage value.
My market view is that, 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 based on my market view.
The government can use fiscal policies, but with closer to $16.0 trillion in U.S. debt, a massive deficit, and an election year, major spending increases may not be in the cards, as per my market view.
The Durable Goods Orders reading for April was soft, with a 0.2% increase, but it was a marked improvement over the -3.7% in March. Excluding the transportation element, orders fell 0.6% versus the estimate calling for growth of one percent.
These are not readings you can get excited about.
The monthly retail sales numbers have been mixed. The Thomson Reuters Same Store Sales Index (comprised of 18 U.S. chains) increased 3.9% in May, which was above the 3.6% estimate, but down from 5.4% in May 2011. The reading is predicted to advance 3.5%-4.0% in June, according to the International Council of Shopping Centers. My market view is that the turmoil in the eurozone and weak jobs market will likely dampen spending enthusiasm.
Also consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage without worrying about losing their jobs and missing payments. With a mere 69,000 new jobs created in May, things are shaky.
- Since the beginning of July through to Friday, the small-cap Russell 2000 Index has tumbled 8%.
Historically, the Russell 2000 has led the general market lower.
THE BUBBLE HAS STARTED TO BURST
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At the end of the day, my market view is that we need to see confidence and the willingness to spend rather than worrying about money.
Only in this scenario will there be sustained spending and economic growth.
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