Consumer Confidence Hits 7-Year High – Really? by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 5, 2014
IN THIS ISSUE:
1. Consumer Confidence Highest Since Late 2007
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2. America’s Unprecedented Consumer Confidence Gap
3. Direction of the Country: Right Track/Wrong Track
4. Economy Surged in 2Q Based on Initial GDP Estimate
5. July Unemployment Report – Yet Another Mixed Picture
6. ISM Manufacturing Index Surges Higher in July
Today we’ll look at several key economic reports over the last week or so. Most have been better than expected. The Conference Board reported that its Consumer Confidence Index surged to the highest level in seven years in July. However, a couple of other reports we’ll look at below paint a very different picture.
The advance report on 2Q GDP came in well above pre-report estimates. Last Friday’s unemployment report for July was disappointing, but at least new jobs were over 200,000 for the sixth consecutive month. The Fed’s favorite inflation indicator (PCE) climbed to the highest level since 2011 last month. And the ISM manufacturing index surged to a three-year high in July. We’ll analyze all of these reports as we go along today.
Finally, a recording of our latest WEBINAR with YCG Investments is now available on our website. You’ll definitely want to hear Brian Yacktman and his team discuss their very successful “value investing” strategy.
Consumer Confidence Highest Since Late 2007
Consumer confidence is soaring on the strength of a warming job market, climbing to its highest level in almost seven years, the Conference Board reported last week. In my blog on June 26, I reported that June consumer confidence had reached the highest level since 2008 at a reading of 86.4 for June.
Yet in the latest report for July, the Consumer Confidence Index soared to 90.9, the highest level since October 2007. It was the third straight monthly increase and solidly beat the pre-report consensus of 85.6.
The report follows a five-month string of bright employment reports after a rocky start to the year that was mostly blamed on the severe winter weather. From February through June, the economy added more than 1.2 million jobs, and the unemployment rate fell from 6.7% to 6.1%, before rising a tenth of a point in July as noted above.
“Strong job growth helped boost consumers’ assessment of current conditions, while brighter short-term outlooks for the economy and jobs, and to a lesser extent personal income, drove the gain in expectations,” said Lynn Franco of the Conference Board. “Recent improvements in consumer confidence, in particular expectations, suggest the recent strengthening in growth is likely to continue into the second half of this year.”
The Conference Board’s survey showed that many consumers see the labor market continuing to improve. Those expecting more jobs in the months ahead increased to 19.1% from 16.3%, while those betting on fewer jobs fell to 16.4% from 18.4%. More consumers expect their incomes to grow, 17.3% in July versus 16.7% in June. Those expecting a drop in their incomes declined to 11% from 11.4%.
America’s Unprecedented Consumer Confidence Gap
Before we get too giddy about the recent surge in consumer confidence, let’s keep in mind that all such readings are an average of the feelings expressed by Americans of virtually all income groups. It might not surprise you that those in the upper income brackets are more confident, while those at lower income levels are less confident. The gap has never been so wide.
While the average Consumer Confidence Index for July reported by the Conference Board was 90.9, for those with annual incomes greater than $50,000, the measure was 112.1; meanwhile among those with annual incomes of $15,000 or less, the measure was just 57.7. For most people with higher incomes, confidence has returned to near-peak 2007 levels, while for most near the bottom, confidence remains at 2008 recession levels.
Over the past twenty-five years, the confidence gap between the top and the bottom income earners has never been greater than it is today. Given the nature of the post-financial crisis recovery, that record is not surprising. The Fed’s unprecedented QE bond buying program has significantly benefited owners of stocks, bonds and commodities, but unfortunately most lower-income Americans don’t own these types of assets.
The stock market is up by more than 135% from its 2009 lows, and this benefits primarily upper-income Americans. Meanwhile, prices for basic commodities from oil to coffee to eggs are up 40% since 2009, double the typical commodity price rebound in post-war recoveries. While rising prices for staples such as these are inconsequential expenses for the wealthy, they are burdens for the poor, who spend 10% of their income on energy and a third of it on food.
Furthermore, the post-financial crisis recovery has been notable for its lack of wage inflation. Average wage increases have failed to keep up with true inflation over the last six years, and many middle and lower-income Americans have found themselves squeezed by weak wage growth and rising food, energy and housing costs.
The impact of weaker confidence among lower and middle-income Americans can be seen and felt all across the nation. Limited discretionary spending by middle and lower-income families is having a direct impact on discount retailers such as Wal-Mart Stores, Inc. (NYSE:WMT), Family Dollar Stores, Inc. (NYSE:FDO) and many others including the auto industry.
I point this out as yet another reason why the current economic recovery has been the weakest in post-war history. I also want readers to understand that anytime I report the official Consumer Confidence Index numbers, there is a huge, unprecedented gap between the responses from upper-income Americans versus those with lower incomes.
Direction of the Country: Right Track/Wrong Track
Not only is there an unprecedented gap in consumer confidence between upper and lower-income groups, here’s another popular statistic that flies in the face of the latest report showing confidence at the highest level in the last seven years. Several well-known polling groups ask this question:
Is the US headed in the “right direction” or is it on the “wrong track”?
An overwhelming majority of Americans, 64.3%, believe the country is headed in the wrong direction, while only 26.0% believe the country is headed in the right direction – according to the latest RealClearPolitics average of four recent polls. Take a look.
You will notice that the only time in recent years when the right direction/wrong track opinions were basically even was back in 2009 not long after President Obama first took office. Since then, the responses have become increasingly polarized, especially since late 2012 when Obama was re-elected.
Put differently, for every one person who believes the nation is headed in the right direction, there are over 2½ people who believe the country is on the wrong track – and that by the way, includes a lot of Democrats.
The question is: How can consumer confidence be the highest in seven years when almost two-thirds of Americans believe the country is on the wrong track? Part of it is the way the two surveys are conducted and the questions asked.
My own opinion on this question is that the right direction/wrong track poll is more of a referendum on the current administration in the White House and the president himself. President Obama’s approval rating has recently fallen to new lows in several prominent polls, and this may explain in large part why the right direction/wrong track gap is so large.
Economy Surged in 2Q Based on Initial GDP Estimate
The Commerce Department’s Bureau of Economic Analysis (BEA) reported last Wednesday that 2Q GDP surged ahead by 4.0% (annual rate). That handily beat the pre-report consensus of 3.2%. The report noted that growth in the 2Q was spurred by consumer spending, inventory investment, exports, construction spending, etc.
The government also revised its previous estimate of 1Q GDP from -2.9% to -2.1%, which had not been expected. The BEA also released its annual revisions to prior GDP reports going back three years. Most notably, the BEA revised 3Q 2013 GDP up to 4.5% and 4Q 2013 GDP up to 3.5%. That makes the second half of last year the strongest six months of growth since the Great Recession.
Yet that strong growth spurt was followed by the revised 2.1% contraction in the 1Q of this year. Now comes the much better than expected advance estimate of 2Q growth at 4.0%. How do we make any sense out of this roller-coaster? Perhaps by taking a look at a longer time period.
As this chart illustrates, the economy has grown at the rate of around 2% for almost four years now. If you look at the period going back to 2010, there are an equal number (9) of quarters above and below the 2% mark. Just when you think the recovery has finally reached escape velocity, it disappoints as was the case in 2011 and late 2012/early 2013.
Overall, the economy appears to be neither as weak as was reported in the 1Q nor as strong as the latest numbers suggest for the 2Q. Since the 2Q of 2013, GDP has grown only 2.4%, in line with the modest pace of growth that has characterized much of this recovery.
The best news in the latest GDP report was that consumer spending, which makes up more than two-thirds of the economy, increased 2.5% in the 2Q, more than double the 1.2% rise in the 1Q. A faster pace of stockpiling by businesses contributed to the 2Q increase – a reversal from the 1Q when a slowdown in inventory building subtracted from GDP growth.
Meanwhile, business investment in equipment surged 7%, versus a 1% drop in the 1Q. Exports jumped 9.5% in the 2Q after falling 9.2% in the previous quarter. Housing construction rose 7.5% after declining 5.3% in the 1Q.
The bottom line on the economy is that while the first estimate of 2Q GDP was more than encouraging at +4.0%, there is no assurance that this is confirmation that the recovery has shifted into a new higher gear. Let’s not forget that there are two more revisions of 2Q GDP growth to come later this month and in September.
July Unemployment Report – Yet Another Mixed Picture
Last Friday’s unemployment report for July was a classic “glass half-full” or “glass half-empty” example. New jobs in July came in at 209,000 which marked the sixth consecutive month that new jobs were over 200,000. That has not happened since 1997.
On the glass half-empty side, the 209,000 new jobs were well below economists’ pre-report expectation of at least 230,000. Also, the official unemployment rate actually ticked up slightly to 6.2%, from 6.1% in June, which had not been expected.
The report also revised up the past two months of gains. June new jobs were revised up to 298,000 versus the original estimate of 288,000. May was revised from 224,000 to 229,000. Also, the labor force participation ticked up to 62.9% from 62.8% for the three prior months. That indicates more working-age people are either working or looking for a job, a rate that has fallen precipitously during the economic downturn.
The biggest industry gainer was professional and business services, which added 47,000 jobs. Manufacturing (+28,000), retail trade (+27,000), and construction (+22,000) saw the next-largest gains. While the July unemployment report was disappointing in some aspects, there were some positives as noted above.
Job creation in this struggling recovery tends to be quite volatile, especially on a monthly basis. However, the broader jobs picture is also one of subtle but consistent improvement. We created 173K jobs/month in 2011; 186K jobs/month in 2012; 194K jobs/month in 2013, and 230K jobs/month in the first half of this year.
Yet as positive as the trend in new jobs over the last few years looks, another new report from the Bureau of Labor Statistics offers some sobering findings. The BLS reported on Friday that almost 11.5 million Americans age 16 and over have left the workforce since President Obama took office in January 2009.
In July 2014, there were 92,001,000 Americans, 16 and over, who were classified as “not in the labor force,” meaning that they did not have a job and had not actively looked for work in the previous four weeks. This number has increased by 11,472,000 since January 2009 (Obama’s inauguration), when the number of Americans not in the labor force was 80,529,000.
US Inflation Accelerated Sharply in Second Quarter
Inflation as measured by the Federal Reserve’s preferred price index surged in the 2Q to the highest annual rate in three years, potentially making the central’s bank effort at managing the US recovery more difficult. The Personal Consumption Expenditures Index (PCE) rose at a 2.3% annual rate in the April-to-June period, compared to only 1.4% in the 1Q.
That’s the fastest pace since the 2Q of 2011. And the “core” PCE that excludes food and energy climbed at a 2% clip, up from 1.2% in the 1Q. The Federal Reserve believes the pickup in inflation has been exaggerated by temporary factors that should ease soon, but if the central bank is wrong, it could be forced to raise interest rates sooner than it would like. The Fed would like to see PCE inflation in an annual range of 2% to 2.5%. Anything much higher or lower is viewed by most central bankers as harmful to the economy in the long run.
ISM Manufacturing Index Surges in July
A key measure of manufacturing activity nationally accelerated in July to the highest point in more than three years, a sign of strength at the start of the 3Q. The Institute for Supply Management (ISM) reported on Friday that its purchasing managers index rose to 57.1% from 55.3% in June, topping the 56.0% consensus. That’s the highest level since April 2011.
New orders rose 4.5 points to a strong 63.4, while production edged up 1.2 points to 61.2 and employment jumped 5.4 points to 58.2. That’s the highest rate of employment since April 2011. Any reading above 50 in the ISM Index indicates economic expansion.
Of the 18 manufacturing industries, 17 reported growth. Similar manufacturing gauges from New York and Philadelphia also had showed strong readings. Only the factory gauge from Chicago pulled back in July.
YCG Investments WEBINAR Now Available
I think that’s enough economics for one letter. As a reminder, a recording of our latest WEBINAR with YCG Investments is now available on our website. You’ll definitely want to hear Brian Yacktman and his team discuss their very successful “value investing” strategy.
Wishing you profits in this crazy market,
Gary D. Halbert
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