Popular Consumer Confidence Measure Falls to Lowest Level Since December 2007
Consumer spending in the U.S. economy looks to be in trouble.
A popular measure of U.S. consumer confidence, the IBD/TIPP Economic Optimism Index fell 2.4% in May. It registered at 45.1, compared to 46.2 in April. What’s problematic is that this consumer confidence measure is only 0.7 points above the reading in December 2007, when the U.S. economy entered into a recession. (Source: Tipponline, last accessed May 7, 2013.) A reading below 50 indicates consumers have a pessimistic view of the U.S. economy.
This U.S. consumer confidence measure essentially has three different components. It asks consumers three questions: 1) how will the U.S. economy perform in the next six months; 2) what is the status of their personal financial outlook; and 3) how confident are they in federal economic policies? Of the three components, two witnessed a decline. Consumer confidence toward the U.S. economy had the biggest drop in May, down 8.5%.
As we all know, consumer confidence is essential to consumer spending, as consumers tend to hold back on their purchases if they believe economic conditions will become worse.
Another major obstacle in front of consumer spending, consumer credit in the U.S. economy grew at an annual rate of only 5.7% in the first quarter of 2013. If this rate remains the same, then 2013 will post an increase in consumer credit, which was lower than the credit expansion rate of 2012. (Source: Federal Reserve, May 7, 2013.) When consumers borrow less, they spend less.
Adding to the misery of consumer confidence, jobs growth in the U.S. economy isn’t anywhere close to what it really should be. Last month, only 165,000 jobs were added to the U.S. economy. As good as this may sound, any economist would agree we need to have about 250,000 jobs added each month in order to see sustainable growth in the jobs market. And the majority of new American jobs this year have been in low-wage-paying jobs.
Consumer spending is a major part of the U.S. economy, and it can make or break America’s economic future.
Look at the chart below, which compares the gross domestic product (GDP) of the U.S. economy (represented by the black line) and consumer spending (represented by the red line).
Chart courtesy of www.StockCharts.com
Consumer spending leads economic growth and contraction. For example, in 2008, consumer spending plummeted first, while the GDP followed after, moving lower.
Add to the poor confidence picture in the U.S. economy the fact that personal disposable income is falling in the U.S. and businesses’ inventories are rising—our economic picture is anything but bright. Hence my concern about the overpriced and overbought stock market.
Exports from the Chinese economy increased 14.7% in April. This was a surprise, because analyst consensus estimates were expecting an increase of only 10.3%. The China General Administration of Customs reported the country had a surplus of $15.1 billion in April—it exported more than it imported. (Source: Reuters, May 8, 2013.)
This is a good sign for the Chinese economy; but the threats of an economic slowdown in the country still persist.
Looking closely at the data, exports from the Chinese economy to the U.S. fell 0.1% in April; and to the European Union, Chinese exports declined 6.4%. The economic slowdown in Europe is still a major issue and exports to the region will likely decline even further.
It is way too early to say the Chinese economy is coming back.
In the first quarter of 2013, the gross domestic product (GDP) in the Chinese economy only grew at an annual rate of 7.7%, compared to 7.9% growth in the last quarter of 2012. While this number looks great when measured against the growth in developed nations in the global economy, it’s nowhere close to the growth rate the Chinese economy has experienced in the past.
According to Fitch Ratings, a credit rating agency, credit in the Chinese economy reached 198% relative to the country’s GDP at the end of 2012. In 2008, this number was only 125% of the GDP. (Source: Time, April 28, 2013.)
Similarly, the debts of local governments in the country are stacking higher, estimated to be $2.0 trillion, or about 25% of GDP. The Chinese economy may very well be faced with a financial crisis due to significant credit expansion in a very short period of time.
Dear reader, one good number doesn’t really mean economic conditions have changed.
I am watching developments in the Chinese economy very closely, because it can impact an already struggling global economy. As news of an economic slowdown in China has surfaced, industrial metals and other commodities have fallen in price, as the Chinese economy used to be a major consumer of these commodities. This will have an impact on U.S.-based companies that are involved in those sectors.
What He Said:
“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.
About the Author | Browse Michael Lombardi's Articles
Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful investing publications,... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
|Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)||$1014.15|
|Trailing 12-month Price/earnings multiple (Most Recent Quarter)|
|Dow Jones Industrial Average Dividend Yield||2.71%|
|10-year U.S. Treasury Yield||2.14%|