Stock Market, Housing Market, GDP Growth: It’s All About Consumer Confidence
Wednesday, September 28th, 2011
By George Leong, B.Comm. for Profit Confidential
Christmas is still three months away, but you know retailers are nervous about the ability of consumers to want to spend. How consumers spend will likely tell us how the economy will fare in 2012 and will help to drive the stock market. With consumer spending accounting for about 70% of the gross domestic product (GDP) growth in this country, it will be critical for consumers to spend.
When consumer confidence is low, you know consumers will likely be more hesitant to spend and hold back on 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. This continues to be my concern.
Consumer Confidence continues to be weak. September was another disappointment, with a dismal reading of 45.4, below the estimate of 46.6 and the revised 45.2 in August. The reading is near the lowest level in April 2009 and clearly indicates nervous consumers.
To tell you how bad the readings are, economists say 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. In my economic analysis, the situation is not good.
Moreover, add in the fact that the U.S. housing market remains a mess after prices declined 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.
A strong housing market is also critical, as homeowners tend to 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 (when homes are dumped below the mortgage value). The key Case-Shiller 20-city Index shows that prices on averaged declined another 4.11% in July across the 20 largest U.S. cities, better than the negative 4.5% estimate and the negative 4.4% in June. These are not good metrics.
The reality is that foreclosures continue to drive a good part of the buying and this does not bode well for housing price appreciation. It may not be until 2013 until prices steadily rise.
And with jobs being a key driver of the housing market, I’m not confident. We need jobs and security in order to give buyers the confidence to assume a mortgage and not worry about losing their jobs and missing payments.
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 at this juncture.
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Tags: consumer spending, economic analysis, GDP growth, interest rates, stock market, U.S. housing market, us gross domestic product history
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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.
