Wednesday, October 28, 2009

Consumer Confidence is a Lagging Indicator: We Should Expect Post-Recession Gloom Through 2010

Scott Grannis: I've never paid much attention to surveys of confidence, mainly because they tend to be lagging indicators. As these charts show (one appears above), consumers are often quite happy until just before a recession starts, and quite depressed well after a recovery begins.

Brian Wesbury and Bob Stein: Meanwhile, the Conference Board’s measure of consumer confidence fell to 47.7 in October from 53.4 in September, as consumers’ assessment of the present situation dropped to the lowest level since 1983. It is not unusual for this measure to bottom after a recession is over and we are more pleased by evidence of actual spending increases than we are dismayed by consumers claiming discontent.

Exhibit A: "Whining" hardly captures the extent of the gloom Americans feel about the current downturn. The slump is the longest, if not the deepest, since the Great Depression. Traumatized by layoffs that have cost millions of jobs during the slump, U.S. consumers have fallen into their deepest funk in years.

"Never in my adult life have I heard more deep-seated feelings of concern," says Howard Allen, retired chairman of Southern California Edison. "Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble."

Says University of Michigan economist Paul McCracken: "This is more than just a recession in the conventional sense. What has happened has put the fear of God into people."

Exhibit B:
If America's economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years. That may explain why so many polls reveal such ragged emotional edges, so much fear and misgiving. Even the economists do not have a name for the present condition, though one has described it as "suspended animation" and "never-never land."

Both excerpts above are from Time Magazine (altered slightly) articles written AFTER the July 1990 - March 1991 recession had ended, the first was from
January 13, 1992 (ten months after the recession) and the second from September 28, 1992 (21 months following the recession). As the circled area on Scott's chart above indicates, consumer confidence remained low for two years following the end of the 1990-1991 recession and it took about three years for consumer confidence to rise to the pre-recession level. The circled pattern following the 2001 recession was similar.

Bottom Line: Even though there is general consensus that the recession ended this summer (probably in June), consumer confidence will likely remain choppy and low through next year, and we'll get reports like these Time Magazine articles about how bad everything is for at least another year as well.

21 Comments:

At 10/28/2009 3:20 PM, Blogger juandos said...

Remember this from the AP?

Higher jobless rates could be new normal

By TOM RAUM, Associated Press Writer Tom Raum, Associated Press Writer – Mon Oct 19, 2:29 pm ET

Retrenching businesses will be slow in hiring back or replacing workers they laid off. Many of the 7.2 million jobs the economy has shed since the recession began in December 2007 may never come back...

 
At 10/28/2009 4:10 PM, Blogger juandos said...

This won't help consumer confidence either...

From CNN, dated October 15, 2009: Foreclosures: 'Worst three months of all time'

"They were the worst three months of all time," said Rick Sharga, spokesman for RealtyTrac, an online marketer of foreclosed homes.

During that time, 937,840 homes received a foreclosure letter -- whether a default notice, auction notice or bank repossession, the RealtyTrac report said. That means one in every 136 U.S. homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008.
===================
From Rasmussen Reports, dated Wednesday, October 28, 2009: Nationally, just 18% of adults say their personal finances are getting better these days while 49% say they are getting worse. While 22% of men say their finances are improving, only 14% of women say the same. Forty-eight percent (48%) of men and 49% of women report their finances are getting worse...

 
At 10/28/2009 6:30 PM, Anonymous American Delight said...

That's a fascinating trend. Once bitten, twice shy.

Still, I'm wary of this post hoc ergo propter hoc analysis. To say that consumer confidence is low, and that consumer confidence is a lagging indicator, and that therefore we must be past the recession, is a bit of a stretch.

 
At 10/28/2009 6:42 PM, Anonymous Benny The Truth Man said...

This is a valuable post by Dr. Perry.

Keep in mind, at the bottom of a recession there are always some voices saying that the good ol' days are over for good.

At the top of every boom are voices saying "Everything has changed, a new world order, boundless frontiers, global markets, Internet, newly sophisticated real estate markets, Pax Americana etc."

Hopefully, we are through the worst of this terrible recession: The Bush train wreck.
The Obama team is serious about the craft of administering the state. They actually show up for work. Let's see what they can do. So far, so-so, but no major mistakes (except perhaps Afghanistan, and staying in).
I expect a recovery. We need to deleverage, and a round of inflation would help that, but so far no inflation.

 
At 10/28/2009 6:55 PM, Blogger Craig said...

If consumer confidence is such a lagging indicator, then why the hell pay attention to it? Now, show me producer confidence figures and I might be interested.

 
At 10/28/2009 7:43 PM, Blogger juandos said...

"The Obama team is serious about the craft of administering the state. They actually show up for work"...

ROFLMAO!

President Barack Obama has only been in office for just over nine months, but he's already hit the links as much as President Bush did in over two years...

"Let's see what they can do. So far, so-so, but no major mistakes"...

Stop! Stop! You're killing me! This is just to funny!

Oh yeah! Team Commie Obama hasn't made any major mistakes... LOL!

Obama team makes it official: Budget deficit hits record. By a lot.

The deficit for fiscal year 2009, which ended Sept. 30, came in at a record $1.42 trillion, more than triple the record set just last year.

In addition, future deficits are currently projected to total $9.1 trillion in the coming decade.

 
At 10/28/2009 7:48 PM, Blogger W.E. Heasley, CLU, LUTCF said...

With a 16% real unemployment rate and an average work week of 33 hours for the remaining employed, the majority of consumers are surely less than confident. The “me next” mentality of becoming unemployed is occurring within the realm of employment.

Those lucky enough to have unemployment benefits are running out of benefits/time. The pool of discouraged workers is increasing at an increasing rate.

Human Capital is stuck as The Spruce Goose of all stimulus plans ever concocted yielded only one employment result: “Saved Jobs”, the ultimate non-statistic statistic.

 
At 10/28/2009 8:57 PM, Anonymous Anonymous said...

It is short sighted to simply dismiss the consumer confidence number as a lagging indicator. Consumer confidence can have electoral consequences and those consequences affect future economic policy.
It is also highly unlikely the press will be running "end of the world as we know it" stories next year. They are overwhelmingly in favor of Democratic candidates and will not be pushing bad news in the run-up to the mid-term elections. Note that the two examples given are from January and September 1992. Bush, the elder, was running for re-election and the press was trying to elect Bill Clinton.

 
At 10/28/2009 9:05 PM, Anonymous What is FHA Loan said...

We are living in a crazy wild world. I say expect the worse so we won't be disappointed.

 
At 10/28/2009 9:31 PM, Anonymous Titus Pullo said...

"Time" won't be giving us "this is the worst economy since the 1930s" stories. There is a Democrat in the White House.

 
At 10/28/2009 10:34 PM, Blogger OA said...

Check out this line from that September 1992 article:

"The structural faults, many of them legacies of the 1980s, represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the defense-industry contraction, the savings and loan collapse, the real estate depression, the health-care cost explosion and the runaway federal deficit."

If I understand what they're saying, it was Reagan/Bush's fault.

 
At 10/29/2009 2:07 AM, Blogger PeakTrader said...

The NBER defines economic slowdowns as recessions, which I think is wrong, particularly from a high peak. I heard, revised real GDP data show the U.S. didn't have two consecutive quarters of negative growth in 2001. So, I think, 2001 was a slowdown rather than a recession. It's remarkable the U.S. can have a quick and massive "creative-destruction" process without a recession, or with a mild recession.

With the glaring exception of allowing Lehman to fail, there were many great economic achievements in the 2000s, which are almost unnoticed. Also, Bush was open to another stimulus plan, i.e. basically a tax cut, shortly after Lehman failed, which the Congress didn't pass.

I think, Obama's economic policies are a disaster, because they both facilitate and prevent growth. Consequently, a lot of money is being squandered. It seems the costs are much greater than the benefits. Strong expansions typically follow deep recessions. The U.S. didn't overproduce in the 2000s. So, it's hard to believe there will be another slow recovery, a jobless recovery or a recoverless recovery :)

 
At 10/29/2009 5:14 AM, Blogger marketdoc said...

I remember when we used to call this "the Business Cycle."

 
At 10/29/2009 9:00 AM, Blogger bob wright said...

marketdoc,

yes, and a cold spell was called weather.

 
At 10/29/2009 10:31 AM, Blogger John Thacker said...

"To say that consumer confidence is low, and that consumer confidence is a lagging indicator, and that therefore we must be past the recession, is a bit of a stretch."

That's not his argument. Mark has posted many other articles indicating why we're likely past the recession, based on leading indicators and current indicators. This post is merely to point out why consumer confidence should not be expected to have rebounded yet, and why consumer confidence does not refute his other posts.

Perhaps you haven't read any of the rest of the blog, which would explain your confusion.

 
At 10/29/2009 10:33 AM, Blogger John Thacker said...

Many of the 7.2 million jobs the economy has shed since the recession began in December 2007 may never come back.

You do know what this means, juandos? It doesn't mean that those people will never be employed. It means that we had too many people going into certain fields, like finance or construction or real estate, that really need to find jobs in other fields. All the smart college graduates were going into finance, far too many of them. Finance got too big; all those jobs in finance won't come back, but smart people will find other jobs.

 
At 10/29/2009 1:16 PM, Blogger Charles said...

"The Obama team is serious about the craft of administering the state. They actually show up for work."

Benny - you kill me! That's straight comedy right there...

 
At 10/29/2009 7:51 PM, Blogger juandos said...

marketdoc makes the salient comment: I remember when we used to call this "the Business Cycle."...

I have a question though, as newer and more sophisticated tools/methods are developed does the, 'business cycle' lose some of its mystery?

Speaking of confidence consider the following...

From David Galland writing at Seeking Alpha: Obama, Pragmatism and the Keynesian Fallacy

 
At 10/30/2009 11:36 AM, Anonymous Anonymous said...

The two articles from Time were published in 1992, an election year. Then Gov. Clinton was campaigning with a focus on how bad the economy was. I believe, the Time articles were it way of helping the Clinton campaign rather than a rigorous analysis of the facts.

 
At 10/30/2009 11:31 PM, Anonymous Dead Dawn said...

Mark has posted many other articles indicating why we're likely past the recession, based on leading indicators and current indicators.

And he has deliberately not posted any articles, indexes, statistics or surveys which contradict that conclusion.

 
At 10/31/2009 5:55 PM, Blogger juandos said...

"And he has deliberately not posted any articles, indexes, statistics or surveys which contradict that conclusion"...

Nothing stopping you Dead Dawn from doing that...

More good news from the housing front, specifically in the Chicago, Il area...

Dollar Homes Lack Buyers

Dollar Homes Lack Buyers

Officials in suburban Barrington put three homes up for a sale at just a dollar a piece - a dollar! - and didn't get a single bidder. (there's a bit more)

 

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