Yesterday’s Preliminary U of Michigan Consumer Confidence number stunk the joint up yesterday. How bad was it? The survey saw a 14% decrease in sentiment. The WSJ notes that "Since July, the index is down 20 points, or 20%. That’s the largest decline in points over a two-month period since comparable records began in 1978."
Wow. The largest recorded drop in consumer sentiment. That’s just got to get the attention of economists, right?
"Richard Curtin, who directs the university’s consumer surveys, said the drop parallels the decline following Iraq’s invasion of Kuwait in 1990: "Such steep and widespread declines in confidence have typically triggered recessions," though a recession is not "pre-ordained."
Indeed, few economists think the downturn in confidence presages a recession. Most economists don’t expect consumer spending to decline in coming months, although they expect consumer spending to grow more slowly. Sentiment plunged following the Sept. 11 terrorist attacks in 2001, but spending did not and confidence recovered several months later. Indeed, adjusted for inflation consumer spending hasn’t declined since the fourth quarter of 1991." (emphasis added)
Thank goodness I’m not like most economists: Even before Katrina, it was pretty apparent that the consumer was really getting over-extended. We extensively discussed how many consumers were almost (but not quite) Shopped Out.
Katrina only made things that much worse.
For those disbelievers, here’s a graph that tracks both U of M Consumer Confidence, and year over year changes in retail sales, along with our ubiq-cerpt:™
Consumer confidence is a key determinant in the Federal Reserve’s assessment of whether Katrina’s impact will be transitory or longer lasting. A sizable hit to confidence might ordinarily tempt officials to pause in their rate increases. But the Fed is anxious that higher energy prices not elevate firms’ and workers’ expectations of prices and wages, and the report suggested that prospect has risen: consumers expect inflation of 4.6% in the coming year, up from 3.1% in August, and to average 3.1% over the next five years, from 2.8% in August. "It puts [the Fed] in a terrible quandary," said Ted Wieseman, economist at Morgan Stanley. He said rising inflation expectations limit the Fed’s ability to compensate for weak growth with lower rates. Still, actual inflation, excluding energy, remains low, which should temper worries about expectations.
The University of Michigan has been tracking consumer sentiment since the 1950s. Mr. Curtin said the preliminary index is based on interviews with 400 consumers from Aug. 26 to Sept. 14. Another 100 will be surveyed for the final index, to be released Sept. 30. While the final index might be higher, he said there was little trend in responses over the two weeks of initial polling."
What does it take to get an economist to see these things before they happen . . . ?
UPDATE September 25, 2005, 9:19am
The NYT has somewhat belatedly reached the same conclusion . . .
Sources:
Consumer Sentiment Sinks As Oil Prices Surge
Confidence Index Fell 14% After Hurricane Katrina; Will Spending Follow Suit?
By RAFAEL GERENA-MORALES, GREG IP and JON E. HILSENRATH
THE WALL STREET JOURNAL, September 16, 2005 9:56 p.m.; Page A3
http://online.wsj.com/article/0,,SB112687305010742854,00.html
After Storms, Confidence May Wane
CONRAD DE AENLLE
NYT, September 25, 2005
http://www.nytimes.com/2005/09/25/business/25marketweek.html
Not to worry, every single indicator which fails to confirm the goldilocks economy, i.e. just about all of them, will be dismissed as a Katrina effect. I will not be surprised if stocks and the dollar continue rising into 2006.
BLR:
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BUH-BYE
Excluding food-and-energy from the inflation calculations makes sense when the price spikes are transitory or seasonal. Like when the refiners are switching over to their summer blend. But this logic only makes sense to me if there are offsetting price decreases throughout the period being measured; rather than prices simply returning to normal.
Just because I am paying the same price for gasoline in the fall as I paid in the spring doesn’t mean my fuel costs did not go up for the year. I would suggest using the average cost of energy over the period being measured.
can’t remember which website referred me to the following article….
the author writes that a steep drop in the consumer sentiment index implies a significant drop/crash in equity prices. for those interested….
http://www.safehaven.com/article-3799.htm