Tuesday, August 3, 2010

Consumer Confidence Still Worse Than Last 4 Recessions

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Fed Chair Ben Bernanke said yesterday that he expected a recovery in consuming spending. Media headlines blared the good news and stocks rallied. The details of 'sometime in the next several quarters' got lost in the shuffle however. Nor did the media report that Bernanke has rarely made a prediction that has turned out to be correct.

An examination of where consumers are now compared to previous recessions can help shed some light on any impending consumer recovery. The Conference Board's consumer confidence number was 50.4 in July. The highest number in the 'recovery' so far was 63.30 this May. The number 90 is used as the dividing line between a lackluster and healthy economy. U.S. consumers haven't registered confidence levels anywhere near that level since December 2007 when the recession began. Confidence was 90.6 that month and then fell and has remained below 90 since that time.

Consumer confidence behaved differently before the 1990/91 recession than afterwards as is the case for a host of economic data. It was after 1990/91 recession when the first 'jobless recovery' took place. Prior to that time, unemployment bottomed during the same quarter that GDP bottomed. Only after U.S. government statisticians started making 'adjustments' to how the economic numbers were calculated in the 1980s, did such impossibilities as 'jobless recoveries' (an oxymoron if ever there was one) start to occur. Consumer confidence is affected by unemployment, so the confidence numbers would reasonably be expected to begin to lag the official recession dates as well.

The two recessions before the 1990/91 recession took place between January 1980 and July 1980 and July 1981 and November 1982. Consumer confidence bottomed in May 1980 at 50.10 (almost the same as the current value) right in the middle of the 1980 recession. The low number for the 1981/82 recession was 54.30 in October 1982, just before the recession's end. The worse point for consumer confidence in the 1982 recession was better than the July 2010 reading. The recovery we are supposed to be in now wouldn't have been recognized in the 1980s.

The 1990/91 recession took place from July 1990 to March 1991. During that period, the low point in consumer confidence was 55.10 in January 1991. That wasn't the ultimate low however. That was 47.30 in February 2002 - eleven months after the recession officially ended. A slow to improve employment picture kept consumers in a subdued state.

The 2001 recession was unique in that it was the only recession in history where consumer spending didn't decline. Since consumer spending accounts for around 70% of U.S. GDP, it is very difficult for a recession to take place at all is there isn't a drop in consumer spending. During the official dates of the recession, March 2001 to November 2001, the low point in consumer confidence was an amazingly high 84.90 in November. The ultimate low was 64.30 in March 2003 -relatively good for a recession bottom. The low point for the 2001 recession is almost the high point that we have experienced in the current recovery.

Recently, the low point in consumer confidence was 25.30 in February 2009. That is not just the bottom for the current recession, but the all-time low (the all-time high was 144.70 in 2000). After committing trillions of dollars for bailouts, $3 trillion in federal deficit spending in the last two years, and zero interest rates since December 2008, we have now managed to achieve a consumer confidence number that is worse than or around the low point for the last four recessions. From the consumer's perspective, government efforts to handle the current downturn look like the most expensive failure in history.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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