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
Q2 Letter: Baupost won big in Q2 with PG&E, eBay, Liberty Global
Seth Klarman's Baupost recorded "strong" gains for the second quarter, although precise numbers were not included in the July 23 letter to investors, which was reviewed by ValueWalk. Klarman said that during the first quarter, they were "substantial purchasers of securities," while during the second, they were "significant net sellers" due to the strong rally. Read More
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 the highest level in seven years. For decades Americans consistently stated their strong belief that their children’s generation would enjoy a better life than they did. Now that has changed, sadly, and by the widest margins since such records have been kept.
Let’s take a look at the two latest polls on this question. The latest NBC News/Wall Street Journal poll was taken on July 30-August 3 and asked the following question:
“Do you feel confident or not confident that life for our children’s
generation will be better than it has been for us?” The results:
By a margin of over 3½-to-1, a huge majority of Americans now feels that their children’s generation will not enjoy a better life than they have. This is stunning!
The latest CBS News poll was taken on July 29-August 4 and asked the following question of young people:
“Compared to your parents’ generation, do you think in general your
opportunities to succeed in life are better than theirs, worse than theirs,
or about the same as theirs?”
In this poll of young people, only 23% believed that their lives would be better than their parents’ while 50% believe their chances to succeed will be worse. Put differently, less than one in four young adults think their lives will be better than their parents. This is really sad.
Food Stamp Dependence Tops 45 Million Three Years Running
According to the Department of Agriculture data, the number of individuals enrolled in the food stamp program (known officially as the Supplemental Nutrition Assistance Program, or SNAP) rose to almost 48 million by early 2013, up from apprx. 30 million in 2010.
As of May of this year (latest data available), there were 46.2 million Americans on food stamps. This marks the third consecutive year that the number of Americans on food stamps has been above 45 million.
Food stamp enrollments have soared in recent years due to President Obama’s lowered eligibility provisions, aggressive enrollment marketing, a bleak economy and intense lobbying by large corporations who bag millions of taxpayer dollars as the number of people on food stamps has climbed.
Indeed, a recent report by the Government Accountability Institute (GAI) found that JP Morgan received well over half a billion dollars ($560,492,596) in fees since 2004 for processing the Electronic Benefits Transfer (EBT) cards for 18 of the 24 states where it provides this service. Who knew?!
Still, despite historic levels of Americans now dependent on welfare, and with the middle class poorer now than it was in 1984 (inflation adjusted), Obama continues to claim that his economic policies have made things better. Obama said in an interview last month with the Economist:
“Since I have come into office, there’s almost no economic metric by which
you couldn’t say that the U.S. economy is better.”
Yet according to Gallup, just 39% of Americans believe the US economy is “getting better” versus 56% who say it is “getting worse.” Again, the question is, how can consumer confidence be at a seven-year high with economic statistics like this?
Real Median Household Income Down Since 2007
Real median household income (adjusted for inflation), has fallen significantly since 2007, before the Great Recession and the financial crisis – from around $55,600 to near $51,000 as you can see in the chart below.
For example, if your daily salary buys 20 gallons of gasoline, and a year from now you get a raise but your daily pay only buys 15 gallons of gasoline, the “purchasing power” of your earnings fell despite the higher nominal salary.
Real median household income has declined since 2007, meaning that the purchasing power of earnings fell. This is yet another reason why our economic recovery has been so weak.
Consumer Spending Falls for First Time in Six Months
Last Friday, the Commerce Department reported that household purchases unexpectedly decreased 0.1% in July (latest data available), the first drop in six months, after rising 0.4% the prior month. This came as a surprise given that the pre-report consensus was for an increase of 0.2%.
Incomes rose at the slowest pace of the year in July, and savings climbed to the highest level since the end of 2012. While an improving job market is lifting confidence, it has yet to spur the broad-based increases in pay that will boost demand at retailers.
The July dip in consumer spending – which accounts for almost 70% of GDP – prompted some economists to cut 3Q growth estimates on fears that American consumers are trimming spending and rebuilding savings.
Of course, the July dip in spending may only be temporary. We won’t know until the end of this month when the August numbers are released. In any event, this is yet another economic statistic that flies in the face of consumer confidence being at a near seven-year high.
Before ending this discussion, please note that I have not mentioned the ISIS crisis in the Middle East, which is looking more and more likely to draw us into some kind of war. That’s not good for consumer confidence. A new poll out today from Rasmussen found that 73% of respondents worry that ISIS is a direct threat to the United States.
Ditto for the ongoing border crisis. Many Americans are worried, and rightly so, that terrorists are coming across our border along with the illegal immigrants from Central America. This is a perfect opportunity for terrorists. Both of these threats should undermine consumer confidence.
I could go on with more economic reports and data that conflict with the latest surprising consumer confidence report and the narrative by President Obama and the mainstream media that the economy is healed – but I think you get the point.
At the end of the day, the question is: How can consumer confidence be at a seven-year high with such discouraging economic facts as those noted above and others? Another question is: How did so many professional forecasters get this one so wrong?
Some claim it is largely due to falling gasoline prices and the strengthening labor market here at home. Yet in poll after poll, respondents rank the economy/jobs as their number one concern.
I spent a great deal of time over the long Labor Day weekend searching for an answer to this question. Unfortunately, I did not find one. Yet there has to be an answer regarding how consumer confidence can be this high in the face of all the negative economic data we have seen recently, not to mention the ISIS threat and the border crisis.
There is a distinct disconnect at work here. I will continue to look into it. In the meantime, if you have any ideas, please let me know. As always, I appreciate your comments and suggestions.
Very best regards,
Gary D. Halbert