Consumer Confidence Hits a Seven-Year High… But by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 2, 2014
IN THIS ISSUE:
1. 2Q GDP: Latest Estimate Came in Better Than Expected
2. August Consumer Confidence Index Rises to 7-Year High
3. Do You Feel the Most Confident in Seven Years?
4. Will Our Children Have a Worse Life Than We Do?
5. Food Stamp Dependence Tops 45 Million Three Years Running
6. Real Median Household Income Down Since 2007
7. Consumer Spending Falls for First Time in Six Months
Last week, the Conference Board reported that its Consumer Confidence Index rose to a near seven-year high in mid-August. It was the fourth consecutive monthly rise in the Index and handily beat the pre-report consensus.
While I have no reason to doubt the validity of the latest Consumer Confidence Index reading, there are several other indicators which suggest that consumers are not so optimistic in reality.
When it comes to the direction the country is headed, 66% believe we are on the “Wrong Track,” with only 26% who believe we’re headed in the “Right Direction.”
Recent polls on the question of whether the next generation’s life will be better than our own have been decidedly pessimistic. For example, the latest NBC News/Wall Street Journal poll of adults found that only 21% believe life will be better for their kids, while a whopping 76% feel it will be worse, the highest negative reading in the poll’s history.
I will cite other examples of statistics that challenge the latest soaring Consumer Confidence Index as we go along today. The question is: How, in the face of all these negative indicators, can consumer confidence be at a near seven-year high?
Before we get into the discussion of the latest consumer confidence reading, let’s take a look at a few other recent economic reports.
2Q GDP: Latest Estimate Came in Better Than Expected
Last Thursday, the Commerce Department reported that 2Q GDP rose by 4.2% (annual rate), up from 4.0% in its advance report in late July and -2.1% in the 1Q. The latest report beat the consensus which had the number remaining unchanged at 4.0%. The Commerce Dept. cited an increase in consumer spending, private inventory building, exports, non-residential fixed investment, state and local government spending and residential fixed investment.
Last week’s estimate of 4.2% GDP growth in the 2Q may be the best we will see for 2014. Most forecasters expect growth of around 3% for the second half of the year. If so, that would mean average GDP of about 2.1% for the whole year.
Durable goods orders surged by a record 22.6% in July, thanks to a huge increase in orders for civilian aircraft. Boeing Co. reported that it received a record number of orders for 324 new planes in July. With a lengthy production period, these orders will not translate into higher GDP for years to come, but illustrate that airlines are feeling more confident in longer-term investments. However, if we exclude orders for aircraft and other transportation equipment, durable goods orders actually fell 0.8% in July.
On the housing front, sales of existing homes rose 2.4% in July to 5.15 million units. That’s the highest reading this year after getting off to a sluggish start. Elsewhere, retail sales were unchanged (0.0%) in July, down from 0.2% in June and well below the pre-report consensus of 0.3%.
August Consumer Confidence Index Rises to 7-Year High
The Conference Board’s Consumer Confidence Index rose to the highest level in almost seven years in August. The widely followed index hit 92.4 in August, up from a revised 90.3 in July, and was the highest reading since October 2007. This was sharply higher than the pre-report consensus for a decline to 89.0, making this one of the biggest misses of the year for forecasters.
The Conference Board, an independent non-partisan research organization, conducts the monthly survey of 5000 households in an attempt to determine the level of consumer confidence. The report can occasionally be helpful in predicting sudden shifts in consumption patterns, though most small changes in the Index are just “noise.”
The Index consists of two sub-indexes – consumers’ appraisal of “current conditions” and their “expectations for the future.” The expectations component makes up 60% of the total Index, with the current conditions component accounting for the other 40%. The Consumer Confidence Index has more than tripled since the low in 2008 but remains well below the benchmark 100 level.
The Conference Board also conducts a quarterly CEO Confidence Survey. CEO confidence rose in the 1Q to a level of 63; however in the 2Q, the CEO confidence level fell one full point to 62. In the 2Q, apprx. 53% of business leaders anticipated that economic conditions would improve over the next six months, but that was down from 60% in the 1Q survey. It remains to be seen if CEO confidence will continue to fall when we get the reading for the 3Q.
The latest dip in CEO confidence dovetails with the NFIB’s (National Federation of Independent Business) Small Business Optimism Index. This Index also experienced a dip during the summer. Here, too, we’ll have to see if this is just a temporary drop or the start of something more serious.
Do You Feel the Most Confident in Seven Years?
Are you as confident in the economy now as you were in October of 2007? You may remember that it was October 2007 when the Dow Jones and the S&P 500 both hit all-time record highs before reversing lower. It was before the Great Recession and the financial crisis unfolded.
Now here we are almost seven years later and the latest Consumer Confidence Index tells us that we are as confident today as we were back in late 2007 just before all the fireworks erupted. I don’t know about you, but I certainly don’t feel that confident today! Most of my clients, business associates and friends don’t either.
Understand that I am not questioning the integrity of the Consumer Confidence Index in recent months, but it flies in the face of numerous other indicators I follow. Perhaps the most stark comparison is the various “Direction of Country: Right Direction or Wrong Track?” polls.
RealClearPolitics.com tracks six different Direction of Country monthly polls including NBC News/Wall Street Journal, CBS News, Rasmussen and The Economist. The average of the six polls taken from the end of July to August 25 was: Right Direction 26.0% and Wrong Track 66.0%. The results from the latest NBC/WSJ poll were even worse as you can see below in the specific polling data.
This of course begs the question: How can the Consumer Confidence Index be at a seven-year high when fully two-thirds of Americans believe that the country is headed down the Wrong Track?” I must tell you that I do not have the answer to this question.
Will Our Children Have a Worse Life Than We Do?
Here’s another development this year that flies in the face of consumer confidence hitting