Lack of confidence spurs spending.

    By Oxy Mora on Fri, 10/28/2011 - 10:26am |

    According to yesterday's GDP numbers the engine of American Consumption is back on the tracks and rolling along at a surprising clip. The odd thing is that Consumer Confidence still remains at a near historic low. Typically an increase in consumption is preceded by a rise in confidence. So why is the spending train rolling along while confidence is like a caboose sidetracked in the train yard?

    A Sept. 15th report by Ross DeVol at the Milkin Institute not only predicted good GDP and consumption numbers for the 3rd Quarter but explained the root cause of the precipitous drop in consumer confidence over the Summer and its disconnect from actual consumer behavior which kept chugging along underneath.

    If you're thinking that the decline in confidence had some connection to our national politics you'd be right. DeVol correlates the decline in confidence to a decline in the approval ratings of -- the Congress!

    But, you say, what about Obama? My statistics prof in business school suggested I leave school altogether so I am loathe to explain why Congress correlated so highly with the confidence drop and Obama was not mentioned. However, arm-chairing it I compared Obama's percentage drop in approval ratings over the Summer to that of the Congress. From June to August Congress dropped from 19 to 12, 31%; Obama dropped from 48 to 42, 12%. O.k., I warned you. (I averaged the Real Clear Politics polls for the entire month of June and the entire month of August).

    DeVol does not suggest that Consumer Confidence will not settle out again in the future as a leading predictor of a rise in consumption, just that, "...surveys of consumer confidence are not infallible predictions of consumer spending, especially when they have been heavily influenced by political conditions in Washington". I might add that DeVol's commentary shows not much respect for the actions of Congress -- and he has the facts to prove it!

    Yesterday's stock market gains appear to have been based upon both the good consumption numbers and a provisional settlement of the deficit problems in Europe. Will consumption keep going, will the market do well, and will confidence eventually be pulled along? Probably not--on all accounts. Economists are already describing the good consumption numbers as a "catch up" from low 2nd Qtr. numbers, and that things are likely to bounce back down again early next year, especially because the Eurpopean Socialists will continue acting out.

    More importantly, Oxy's new economic indicator, the New Normal Political Deflator, NNPD, will most likely keep confidence low. Jim Cramer of CNBC put it well: "The hedge funds aren't going to take this good market lying down. They will soon put the Super Committee back on the front pages." I agree, and include all the naysayers who have an investment in keeping confidence low. The Super Committee will fail to reach an agreement because Republicans will not include revenue as part of the package. Result, another ratings downgrade.

    Speaking of the front page, there are two Disconnects which should be headlined. The first is Obama's disconnect with Independents which my gut tells me is vitally linked to low consumer confidence numbers but which I wouldn't touch here with a ten foot statistical pole.

    The other Disconnect is the most troubling one of all -- that while GDP is back to where it was before the Great Recession and consumption is rolling along, the employment crisis and the housing crisis are still with us. A great swath of Americans are simply not participating in whatever recovery and spending increases have been achieved. In fact they are not consuming, they are hurting. It is a national disgrace, this exclusion of so many from the higher expectations of most.

    I don't know if there will be enough steam and enough confidence to get Obama back into the White House in 2013. But I remember another caboose -- the one I watched in knee pants as my Dad climbed up to shake Harry Truman's hand in the "whistle stop tour", in Ohio in 1948. I have grave doubts that simply running against a "do nothing" Congress as Truman did will work this time around. Results matter. We need to get people back to work and solve the housing crisis. Only then will confidence really be on the rise.   

     

    Comments

    Here's Brad Delong:

    Non-residential investment grew at a 16.3 percent annual rate in the third quarter,............................-exactly what we would not see if business "uncertainty" about regulatory policy were holding back the recovery.

     

    Here's Flavius

    actions speak louder than words

     


    by Flavius on Fri, 10/28/2011 - 12:39pm

    Based on this: Residential Investment as a Percentage of GDP, perhaps the new popular campaign slogan will turn out to be "It's the mortgage mess, stupids"?

    That graph is so intriguing, if you just got the uptick to make the red line go back to 1990's levels, seems almost as if that's all we might need?

    As to the summary opinion of The Economist writer there, about more households eventually being created, and rents rising if building doesn't resume, am I right to wonder why unemployed or under-employed people would start a new household and not just stay with "mom"? Is that not the catch-22?

    Also Yglesias pointed this interesting factoid out: We’re Richer (In Aggregate) Than We’ve Ever Been with the cavaet that the population has grown in the past three years, so we’re still poorer on a per capita basis.

    Not understanding much about these things, all I can say is what a strange strange economy this has been. It wasn't in my Econ 101 textbook, that's for sure.


    by artappraiser on Fri, 10/28/2011 - 2:31pm

    Artsy, I think you are absolutely right about the slogan on the mortgage mess and I don't think
    the Obama can take much credit for anything there. Yesterday Biden's son, AG in Delaware, announced a suit against MERS-incorporated in that state------, so maybe there will be indirect credit for the White House. An additional thought: I had the experience of the bank nearly calling my working capital loan in late 2008--which would have been very serious because I hadn't planned on it. Once you've had such an experience you get much more focused on "cash"------------which is what-I think-many large corporations have done. Companies are holding on to (or should that be onto?) cash and conversely holding off hiring as long as possible.


    by Oxy Mora on Fri, 10/28/2011 - 2:44pm

    the experience of the bank nearly calling my working capital loan in late 2008

    It's my understanding from a relative that dealing with similar is what a lot of the smaller guy commercial real estate developers have basically been doing the last 3 years. They work with threats from banks to shut down what they got, that's what they do now for a job.


    by artappraiser on Fri, 10/28/2011 - 2:52pm

    When you get into that position, it's a full time job dealing with creditors and banks and an extremely stressful job at that. Typically the other thing that happens is that customers are also having a bad time of it and they slow down paying you what they owe for services and products already delivered.  


    by Oxy Mora on Fri, 10/28/2011 - 3:00pm

    See "Spengler's" argument in his Nov. 1 column for Asia Times:

    http://atimes.com/atimes/Global_Economy/MK01Dj04.html

    Unusual twist on this all, but very thought-provoking; he thinks the stage is set for GOP wins.

    ("It's the bankrupted state & local governments squeezing the few homeowners left, stupids"?)

    Reminded me of the last Michael Lewis piece for Vanity Fair that Donal posted--if you didn't read that, I'd highly recommend it.


    by artappraiser on Tue, 11/01/2011 - 2:43am

    IMO, there's no way to distil this into a single-cause slogan ... there are so many messes that we've half-forgotten about a ton of them that are still lurking in the shadows. Maybe something like "It's the mess stupids."

    I thought the contrast between the economist article and the original Calculated Risk article the graph came from was also kind of interesting. If I'm reading it right, they seemed to draw nearly opposite conclusions.

    (Calculated Risk)

    The key leading sector - residential investment - has lagged this recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.

    vs.

    (Economist)

    The country may have had too many housing units at one point during the boom, particularly in certain outlying areas in especially bubbly markets. Whatever national excess there was has vanished. Once growth triggers a rise in household formation, housing demand will soar, and if the government can't clear up the lending channel, rents will begin soaring too.

    I'm still looking deeper at the Calculated Risk stuff ... but at first glance the contrast appears somewhat striking - and would seem to imply very different things for our short/mid-term housing-related markets.


    by kgb999 on Sat, 10/29/2011 - 3:17am

    Thanks-Flavius-its a pleasure to have your--------------------comments.

    If you meant to point out the stuffs about regulations' holding back business-investment---------- is pure bull--------shit, I agree with you.

    "Cap-ex" spending is one area which might surprise to the upside. For one thing-as in my case-----I've purchased some equipment to take advantage of the fast write-------offs. The thing is is that a company doesn't actually have to have had the equipment delivered by Dec. 31----------as long as the sales' order's been signed by Dec. 31. So my take is that much spending may be back-end loaded.

    Inventories showed a decline-which is probably a good-thing-because if the momentum can be sustained on the consumption side, manufacturers will have to produce more and we might be looking at a snapback effect.  

     

     


    by Oxy Mora on Fri, 10/28/2011 - 2:28pm

    Yes I meant that neither current regulations nor confusion about the extent of future regulations is a significant factor in reducing investment.

    If there's a market businesses will invest. If not , not.

    I'm reminded of Saki's aunt.

    Stingy and mean and when he and his (?)brother were sent to visit her there was never anything good to eat or fun to do.

    But if they misbehaved they always got told at great length that she had intended to take them to a carnival but now that they have been so naughty  she won't.

     

    Interesting explanation of why this year's capex may be artificially hyped.

     

     

     


    by Flavius on Fri, 10/28/2011 - 7:35pm

    Thanks, Flavius. Saki's aunt--great story.


    by Oxy Mora on Fri, 10/28/2011 - 10:12pm

    Speaking of confidence, I too was thinking last night how people aren't making a big enough deal about the approval rating of Congress. It is simply amazing! One for the history books! What the hell is going to happen with the next election, really?! Who/where the hell are the candidates that are going to replace them? It's only a year away and I read nothing about challengers ranting about the incumbents. Are they busy out collecting corporate donations that will doom them? Will voters just leave their ballots marked "none of the above"? Will there be successful write-in campaigns once people start paying attention, too late to get on the ballot?


    by artappraiser on Fri, 10/28/2011 - 2:41pm

    I didn't see it on Real Clear Politics but yesterday there was an article somewhere that a poll was done for Dems in Congressional districts in which the states have completed redistricting. They found 10 districts where R's are polling less than D's as of the moment.  

    One thing that I didn't double check but seem to remember is that from early Sept. when the above piece was written Congress has gone on down to 9 from 13 while Obama's is at least back to 42 or 43. There were a couple of Obama polls that bounced down to 39. (and I frankly don't know if you get down to 13, if going on down to 9 is really significant. But then again, going from the 20 area to the 10 area in 4 or 5 months looks pretty much like a 50% drop).


    by Oxy Mora on Fri, 10/28/2011 - 3:46pm

    What is missing is the saving index in this report. I bet it dropped. The price of basic food items seen big increases. This will cut into saving and push up spending with low consumer confedence. I hit my spending ceiling a while ago. I think twice before I spend a dollar a pound for potatoes or make peanut butter cookies. So I buy less potatoes and substitute a box of instant mash potatoes, rice and/or noodles to my shopping cart. The person that still is saving will save less and still buy the same amount of potatoes. I check out spending the same but with more items and the other person spends more on their normal grocery cart. Over all the grocer is ordering more new line items in instant potatoes, noodles and rice with an increase in dollar sales because many shoppers are doing the same thing as me and the potato lover. It makes grocery sales look good even with the drop in the pounds of potatoes bought.

    by trkingmomoe on Sat, 10/29/2011 - 1:45am

    What is missing is the saving index in this report. I bet it dropped. The price of basic food items seen big increases. This will cut into saving and push up spending with low consumer confedence. I hit my spending ceiling a while ago. I think twice before I spend a dollar a pound for potatoes or make peanut butter cookies. So I buy less potatoes and substitute a box of instant mash potatoes, rice and/or noodles to my shopping cart. The person that still is saving will save less and still buy the same amount of potatoes. I check out spending the same but with more items and the other person spends more on their normal grocery cart. Over all the grocer is ordering more new line items in instant potatoes, noodles and rice with an increase in dollar sales because many shoppers are doing the same thing as me and the potato lover. It makes grocery sales look good even with the drop in the pounds of potatoes bought.

    by trkingmomoe on Sat, 10/29/2011 - 1:45am

    I'm not sure it's correct to automatically equate GDP growth with increased consumption. At least not as increased consumption is traditionally viewed. Suppose households in the low/middle income ranges were just hit with an increase in unavoidable corporate fees that average $50 per month per household - wouldn't the entities that captured those fees be reporting in such a way that they contributed to the GDP yet not actually represent a voluntary expenditure on the part of the consumer nor represented an actual increase in quantity of goods they were able to acquire and consume? Or inflation for that matter.

    If something like that occurred, couldn't it be a more plausible explanation for the disconnect between the majority's personal outlook contrasted against the increasing bottom lines of corporate earnings and the outlook of those who benefit simply because of the GDP number being higher irrespective of why, specifically, that number has seen an increase? There really are a TON of consumer traps kicking in over the last few months that have significantly increased the cost of living for folks who don't have an extra $1000 to keep their minimum balance up, don't have bank accounts at all, get public assistance (in the form of increased automatic per-transaction deductions on electronically disbursed benefits via debit card for example), etc., etc. All of this stuff should be showing up on bottom lines just about now.

    Either way, my understanding is that even with this number, GDP growth barely matched population growth. Assuming the number isn't revised downward (as has been the trend), isn't that really just barely treading water anyhow? In other words, even of we grow at this so-called healthy clip forever - won't the current level of distress consumers are feeling continue indefinitely without seeing a much greater quarter-on-quarter improvement?

    Seems as if one is on the upside of the current economic situation, this could possibly be construed as good news - as it could be seen as a case of "you may get to keep yours"; but for those already on the downside or a half-point adjustment away from the abyss, unless one takes an absurdly optimistic view that doesn't seem to have much basis in economic reality - these numbers simply mean the economy holds no future for anyone who doesn't already have one locked-in.

    IMO you are terribly off base when you assume things are rosy for most and only tragic for a scattered few not yet caught up in what you see as a dizzle-done recovery. Things totally suck - for example, food costs anywhere between 20% and 80%+ more than it did this time last year. This means that the 25% of Idahoans on food assistance get that much less food on the table - while those with the money to spend end up with that much less discretionary income. Someone up the economic food chain put the difference in their pockets and now you are calling it growth. But we purchased this growth with a couple trillion in QE. It isn't real in any rational economic sense ... it's simply killing us.

    We're going to end up with Romney. Who wants to vote for a total dipshit aside, any chance Obama had of recapturing the youth vote pretty much got assed-out by OWS ... a shiny new bike, and it ain't cool to like Obama anymore. Maybe if he wasn't such a total douche about Marijuana .... kids like pot.


    by kgb999 on Sat, 10/29/2011 - 1:53am

    I think the best thing you can say about the GDP numbers is that it could have been a lot worse---and---it is now being conceded that a double dip "recession" is not in the offing. A couple of things like Europe, and another ratings down grade, could possibly put us into another "recession. But I agree with you that this level of "growth" is not going to move the needle much, if at all, on unemployment. I don't think I implied "scattered few". What I said was a large "swath".

    "Consumption" is 70% of GDP, as currently defined. That these consumption numbers should be parsed, I agree. The way I understand it, "retail spending is 40% of the 70%". And therein most likely lies the worst implications of the overall numbers because my guess is that the "affluent" component of retail is the real driver.    

     

     

     

     


    by Oxy Mora on Sun, 10/30/2011 - 11:44pm

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