Markman: Consumers Are Cowering

by Jon Markman | July 8, 2011 1:27 pm

Are you worried about the state of the economy? Turns out you are not alone — far from it.

The Conference Board’s measure of consumer confidence for June released recently showed that the two-month decline in equity prices, the jump in the unemployment rate (and that was before Friday’s disappointing jobs report) and the plunge in house prices more than offset any boost from the decline in gasoline prices. Basically, the data shows consumers are pretty depressed.

Despite gas prices declining sharply over the past month and a half, U.S. consumer confidence has weakened much more than expected. The Conference Board index fell to 58.5 in the last week of June from 61.7, the second drop in a row — and now sits at the lowest level since November. 

The deterioration in sentiment was spread out between the ”present situation” as well as ”expectations,” with the latter at an eight-month low. I realize that there are a lot of numbers published every month, but this expectations number is very important as it leads and correlates well with consumer spending.

BMO Financial analysts pointed out that jobs and home values were the two long-term factors that played a big role in driving confidence lower. The employment number was really ugly. The survey showed that more consumers found jobs more difficult to come by, and fewer consumers found jobs plentiful. The net ”jobs-hard-to-get” measure worsened for the second straight month, and essentially telegraphed Friday’s weak unemployment report – with the jobless rate ticking up to 9.2%.

I had a long conversation with Lakshman Achuthan of the Economic Cycle Research Institute recently, and one point he made most strenuously is that his work suggests that employment growth has peaked for the cycle. Private employment growth won’t get any better than it got in February to April, he said, adding: “That’s as good as it gets.”

One decent piece of news came in the housing sector. The S&P Case-Shiller home price index showed that prices in the top 20 metropolitan areas fell only 0.1% in the latest survey. Admittedly, that’s a thin reed to lean on considering that have fallen 10 months in a row and are still 4% below year-ago levels. The leading metropolitan area in the latest survey was Washington D.C., followed by Minneapolis and Atlanta, where prices rose, respectively, 2%, 1.1% and 0.9%.

Here’s the problem. Consumers are fretful about the future because jobs are hard to get and home prices are falling. Yet companies are holding back on hiring plans until they see consumer start to spend more. It’s a vicious circle, which is what makes a cycle of this type so hard to escape. 

Achuthan said that his work shows that industrial growth is in a profound, pervasive cyclical decline
 — not just in a “soft patch” stemming from the supply chain disruption that followed the Japanese earthquake. If that’s true, then the nice little advance we are seeing in the stock market now may be just a bounce in the downtrend that started in late April.

Now here is where it gets tricky. Corporate earnings growth is still fairly decent, because companies are not spending as much on employees. So, in the coming earnings season we may have the spectacle of companies announcing good second-quarter results but weak forward guidance. This is a good reason to keep some powder dry in portfolios and maintain a posture of hopeful caution.


Part of the problem is that wages are flat. U.S. personal incomes were reported to have risen 0.3% in May, but that was just an initial reading and the previous month’s increase was shaved to nothing because it turned out any extra money went to savings. The  U.S. savings rate ticked up from 4.9% to 5% last month.

Nice job, America! As long as you aren’t investing in retailers, anyway.

The savings news was good from the perspective of household balance sheets, but it’s kind of lousy for economic growth. Personal spending was unchanged in May, rather than the 0.1% expected increase, which marked the weakest monthly performance in a year. Including inflation, personal spending sank 0.1%, which was the second monthly decline in a row. That basically rules out any support from the consumer in the second quarter.

Panning out to the bigger picture, this probably means annualized real consumption probably grew by less than 1% in the second quarter as a whole — compared with 2.2% in the first, which is really pretty bad.

Real consumption growth was expected to come in around 1.5%, so the risks to second-quarter gross domestic product growth forecasts of 2% are now on the downside. Yikes.

However, here’s a good excuse from bulls: Some of the decline in real spending in May was probably temporary. The 0.8% month-over-month decline in goods spending was led by a sharp fall in vehicle sales. Some of that decline should be reversed in the third quarter, Capital Economics analysts argue, as the Japan-related supply shortages fade.

And, here’s another excuse. The 0.2% month-over-month increase in services spending would have been larger if it wasn’t for the unseasonably cool weather.

I don’t normally put much stock in the weather excuses. There’s bad weather every quarter it seems, at least in some region. One real reason that consumers have held onto their wallets: Nominal incomes rose by just 0.3% in May and real incomes were up by 0.1%, according to the latest data.

Real incomes (i.e. inflation-adjusted) have been almost unchanged for the last four months. Simply put, the consumer recovery lost momentum in the second quarter. 

With any luck, some of that will be reversed in the third quarter as the latest decline in gasoline prices provides a boost to households’ spending power. But that won’t be enough to usher in the good times that will make retailers like Urban Outfitters (NASDAQ:URBN[1]) and eBay (NASDAQ:EBAY[2]) come back to life. 

I met a veteran eBay retailer at a party over the weekend who told me that sales have absolutely nose-dived in a way she has never seen before — even worse than 2008 and the first half of 2009. She sells vintage dresses that used to fetch $125-$185, and now rarely fetch more than $50 to $65 — and inventory is piling up. She said if sales did not improve she would have to look for another job for the first time in six years.

That’s front-line retail for you, and more than likely a microcosm of the sector overall at a time when consumers are pulling back from purely discretionary purchases.

  1. URBN:
  2. EBAY:

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