The Eight Catalysts That Will Make or Break Consumer Confidence - and Perhaps the Economic Rebound - in the Year's Second Half

By , Money Morning • July 27, 2009

By Bob Blandeburgo
Associate Editor
Money Morning

Burned by credit defaults, unemployment, and fewer income gains, consumer confidence is tepid at best.

Despite a growing belief that the recession is at or near its nadir – and a string of upbeat corporate profit reports that have sent stocks up to their highest levels this year – consumer confidence dropped to its lowest level since April. According to the Reuters/University of Michigan Survey of Consumers, the final sentiment level for this month dropped to 66.0, down from 70.8.

"People are a little more worried about the economy, especially over the labor market and what's happening in Washington,” David Wyss, chief economist with Standard & Poor's Ratings Services, said in a Reuters interview. “It's still consistent with the picture that the economy is bottoming out, but you are not going to get a big bounce in consumer spending,"

Without that surge in consumer spending – which accounts for two-thirds of U.S. economic activity – the rebound may run out of fuel.

“The consumer isn’t going to be a leader in this recovery,” Nigel Gault, chief U.S. economist at IHS Global Insight Inc. (NYSE: IHS), told Bloomberg News. “Consumers are aware that the labor market is still pretty bleak. Any recovery in consumer spending will be very, very modest.”

There are a number of potentially contradictory forces at play that could either boost – or blunt – consumer confidence:

• The Consumer Price Index (CPI): The CPI continues to fall on a year-over-year basis, despite the U.S. government increasing the money supply.
• The U.S. Federal Reserve’s “exit strategy:” When the recession does end, will the huge, afore-mentioned increase in the money supply start a rash of inflation, or will the central bank’s exit strategy keep prices in check?
• The lack of income gains: In the Reuters/UM survey, the fewest consumers in its more than 60-year history reported income gains. While it didn’t go into specifics, the U.S. Bureau of Economic Analysis (BEA) said incomes grew 1.4% thanks in large part to stimulus checks. Without those checks, growth was just 0.2%.
• The health of the housing market:  In many places, the housing market appears to have finally hit bottom, with nationwide sales of existing homes rising 3.6% in June, the third straight monthly increase. Prices are still low in many U.S. regions, and the $8,000-tax-credit incentive for first-time homebuyers continues through November. Twenty-nine percent of home sales came from first-timers, according to the National Association of Realtors.
• Rising unemployment: U.S. unemployment is still rising, and will continue to do so in the second half of 2009, topping off between 9.8% and 10.1%, according to Fed estimates.
• Unemployment insurance claims: While overall joblessness is rising, the moving average of initial unemployment insurance claims is shrinking: For the week ended July 18, the average was 566,000, down 19,000 from the week before.
• The personal savings rate: Suddenly, spendthrift Americans have become good little savers, causing the personal savings rate to zoom to its highest level in more than 15 years; in May, the rate was 6.9%, up from the near-zero levels of early 2008.
• Tightening credit: The once-free-flowing credit for those great financing deals aren’t nearly as abundant as they once were, and it’s showing. Buying plans for homes, vehicles and major household durables all declined this month, according to the Reuters/UM survey.

 

While Wall Street and the public companies who rely on its backing  rallied last week thanks to a wave of mostly positive earning and an equal amount of positive forecasts for the second half, the fact is most consumers are either out of touch with such news – or just don’t care.

Instead, these key economic and financial factors will be the catalysts that make or break the consumer spending – and perhaps the economic rebound – this fall and through to the end of the year.

[Editor’s Note: Consumer confidence is, in large part, determined by whether consumers have job and income security. Elsewhere in today’s issue of Money Morning – as part of our ongoing mid-year economic forecast – read Contributing Editor Don Miller’s analysis of the United States’ second-half job prospects by just clicking here.]

News and Related Story Links:

• Money Morning:
  Unemployment Rises, Payroll Losses Far Exceed Analysts’ Estimates
• Reuters:
  U.S. Consumers’ Mood Wanes in Late July: Survey
• Money Morning:
  Higher Gas Prices Give CPI a Lift, But Annual Prices Drop Most Since 1950
• Money Morning:
  Four Ways to Profit if Bernanke’s ‘Exit Strategy’ Backfires
• Bureau of Economic Analysis:
  Personal Income and Outlays
• Bureau of Economic Analysis:
  Personal Saving Rate
• Money Morning:
  Economic Outlook Improves, But Unemployment and a Possible Jobless Recovery Remain Wild Cards, Bernanke Warns
• National Association of Realtors:
  Existing-Home Sales Up Again
• Reuters/University of Michigan Survey of Consumers:
  Consumer Confidence Slips