Low Consumer Confidence and the Spending Cycle

Sept. 2, 2011 - PRLog -- We all know that consumer spending accounts for about 70% of the gross domestic product (GDP) growth in this country. And when confidence is low, you also know consumers may be more hesitant to spend, holding back on any major purchases, such as homes, vehicles, furniture, appliances and travel, to list a few. This will impact spending and GDP growth and the ability of companies to expand their businesses and hire. This is my concern; I feel that continued nervousness among consumers will impact GDP.

Consumer Confidence in August was another disappointment, with a dismal reading of 44.5. The reading was well below the estimate of 52 and the revised 59.2 in July. The reading is the lowest since April 2009 and clearly indicates nervous consumers.

To tell you how bad the readings are, economists say 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. My very basic economic analysis is that the situation is not good.

Moreover, add in the fact that the U.S. housing market remains in a mess 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 $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. Plus, spending more doesn’t mean consumers will join in.

On the plus side, the Durable Goods Orders reading for July was better than expected. The headline reading grew 4.0%, well above the estimate of 1.9% and the negative 1.3% reading in June. The ex-transportation reading of 0.7% was also better than expected. The readings offer some optimism, but then it is only one month. We need to see a pattern.

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 where homes are dumped below the mortgage value. The industry numbers support the weakness. Housing Starts of 604,000 in July were slightly below estimates and a decline from a revised 613,000 in June. Building Permits of 597,000 were also weaker than expected. New Home Sales fell to 298,000 in July, short of the 310,000 estimate.

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 and not to worry about losing a job and missing payments. The non-farm payrolls are due out on Friday and I’m not confident.

At the end of the day, we need to see confidence and the willingness to spend and not to worry about money. Only under this scenario will there be sustained spending and economic growth. Unfortunately, there is little for us to get excited about at this juncture.

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