Wednesday, 19 October 2011

Consumer, Why So Gloomy?

Yesterday the NY Times posted a commentary with the speculative title Gloom Grips Consumers, and It May Be Home Prices. The article appeared in print this morning, and it has been widely circulated around the Internet, notably by CNBC. The text is filled with poignant stories of personal struggles since the housing peak and subsequent Financial Crisis.

Interestingly enough, today CNBC also published a Reuters item — one (like this commentary) with a question tease as the title: Has Market Sentiment Diverged From Reality?

Predictably enough the Reuters piece takes an ambivalent view, but it includes the obligatory warning that negativity could "push the global economy over the edge."

Consumer sentiment and small-business-owner optimism are topics I track monthly on this website, and my view of the data puts the secular peak in confidence much earlier than the crash in housing prices and 2008 Financial Crisis.

Check the charts below for the all-time high in consumer confidence, whether you use the Reuters/Michigan Consumer Sentiment Index or the Conference Board Consumer Confidence Index.

Both show that confidence peaked in 2000 — well before the housing-bubble peak in 2005, and the market peak in 2007, and of course the Financial Panic of 2008. The Small Business Optimism Index, which has a substantial residential real estate component, was buoyed by the housing bubble. It peaked in late 2004, just before the major housing indexes topped out.

When we look closely at these confidence indictors, we see that the shift in mood began well before the events focused on in the NY Times and Reuters articles.

There is, however, another key data series that better matches the contours of the consumer confidence charts, namely the trend in real (inflation-adjusted) household earnings.

As these two charts illustrate, the 21st century has witnessed a loss of purchasing power for most households — a combination of reduced nominal incomes and the impact of inflation. In fact, the average income for U.S. households in their peak earning years has fallen over 13 percent in real terms since the beginning of the new millennium.

There is no question that the decline in home values and the festering wounds of the Financial Crisis have both contributed significantly to the decline in consumer confidence. But the origin of the grim mindset of the U.S. consumer correlates with the sustained erosion in household incomes that began years before events discussed in the NY Times and Reuters articles.

The consumer has been experiencing a prolonged bout of tunnel vision. And if real household income is a key cause, there is not yet a hint of light in the distance to mark the end.

by: Doug Short


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