Consumer Confidence and Commodity Weakness Heralding An Economic Slowdown

The data keeps coming, and its getting harder for the perma-bulls to rationalize the information. Earlier in the month, University of Michigan Consumer Confidence plummeted the lowest level since last October; the blame went to "Terrorism fears and higher gasoline prices;"

Since that August 18 report, gas prices have dropped significantly.

This morning, it was the Conference Board’s turn to release their data — and their confidence index dropped the most since last September post-Hurricane Katrina. Blame for the drop this time went to "Weak Housing and the War in Iraq, and Employment."

I have a different theory: Consumer Confidence is weak due to no real wage gains for more than 2 years;  It is not Housing per se, but rather, the inability to extract equity via HELOCs that are to blame for the poor confidence showing.

Even the reconstituted Leading Economic Indicators have continued to weaken:

LEIs, Year-over-Year percentage change, 3 years



Indeed, when we look at the prime driver of this cycle’s inflation — commodity demand — is starting to cool off. Spurred by weakness in oil, the Reuters/Jeffries CRB index is testing key 5-year uptrend.

5 Year Chart — Commodities


Source: Michael Panzner, Collins Stewart


One possible interpretation of that is the commodities market is anticipating cooling demand — from the decrease in New Home construction, the slowing of the broader US economy, even a lessening of US purchases of goods made in China.

This is a chart worth watching over the short term as it could be the canary in the coal mine . . .



Consumer Confidence Tumbles

WSJ, August 29, 2006 10:18 a.m.

U.S. Economy: Consumer Confidence Declines to Nine-Month Low
Bob Willis
Bloomberg, Aug. 29, 2006

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What's been said:

Discussions found on the web:
  1. KirkH commented on Aug 29

    There’s an interesting new paper over at the Cato institute which discusses wages and productivity

    “Machines complement human labor when they become more productive at the jobs they perform, but machines also substitute for human labor by taking over human jobs. At first, expensive hardware and software does only the few jobs where computers have the strongest advantage over humans. Eventually, computers do most jobs.
    At first, complementary effects dominate, and human wages rise with computer productivity. But eventually substitution can dominate, making wages fall as fast as computer prices now do.”

    PDF Link
    Seems like a downturn might be more than a temporary blip if that is a real trend.

  2. RI commented on Aug 29

    great call on the consumer … this boom has been Housing and the bust will be Housing …..Energy is important , but not as important a % of the economy……
    home ownership and their values are so ingrained into the psyche of most people that a significant drop is/will cause a huge drop in Consumption … the last few series of Pers. Inc/Spending show that we’re near the magical 6% yoy # , usually a precursor to an economic downturn

  3. john john commented on Aug 29

    I’m inclined to be bearish, but didn’t Barry post a missive once about the uselessness of the LEI, consumer confidence number and other major economic numbers?

    Though the $CRB’s weakness should be heeded as a warning for economic weakness.


    BR: Yes, I think the Conf Board are cheerleaders – and that is why I specifically noted: “Even the reconstituted Leading Economic Indicators have continued to weaken.”

    The key word is “reconstituted” — had the conference board not screwed around with them, the LEIs would be even more negative. . . .

  4. erik commented on Aug 29

    i’m off the crash train for this fall. things will get sticky, but i believe the ppt has to hold the line here if anytime in the last six years. a crashing stock market with a crashing housing market would be too devastating to pick-up the pieces, regarless of the reckless policies that created either one. with paulson and professor depression working the levers, i think with a little manipulation we could see a fairly strong close to this year.

    i hope that our housing market mimics what happened in britian over the past two years. their rate cuts were about one year ahead of ours and their housing sector cooled, recollected itself and began trucking again this year. there’s proof in the pudding of a soft landing and there’s room to think we may benefit from their telemarking the controls.

  5. RMX commented on Aug 29

    I think erik makes a good point and one that I’m surprised hasn’t been discussed very much. Most “intervention” comments I’ve seen tend to focus on the upcoming elections. While I wouldn’t dismiss that premise entirely, I think the housing situation provides a much clearer motivation. If the housing bubble is deflating, as it must, then I don’t think the feds would want to see the stock market tanking at the same time. This propping up may not last forever but could continue longer than many think; certainly long enough to push Barry’s scenario out in time.

    I don’t follow the UK that closely but my impression is that the attempt to engineer a “soft landing” in housing over there may have had some initial success but at the cost of letting inflation continue to pick up to the point where the BOE surprised most observers with a rate hike. So I think the story may still be unfolding there.

  6. permabull commented on Aug 29

    An article for this site that is just begging to be written is one on the outcomes of the last three large declines in Housing.

    Using New Private Housing Building Permits as a proxy, those periods are :- Jan 73 to early 75, mid 78 to late 81, and Jan 87 to Jan 91.

    These periods each saw declines in Permits of over 50%.

    However the outcomes – including the reaction of home building stocks – were not uniform through all three periods and there were some interesting and very counter intuitive outcomes.

    I know because I’m old enough to have been an investor during all of them – and a couple before that.

    So this post is by way of a friendly poke to Barry’s ribs to get him to write the post that’s begging to be written now that Housing is falling apart – yet again.

    As always, well done on the site.

  7. Michael C. commented on Aug 29

    >>>Using New Private Housing Building Permits as a proxy, those periods are :- Jan 73 to early 75, mid 78 to late 81, and Jan 87 to Jan 91.<<< Having lived through the above and invested during all of those times, what do you foresee in the housing market and the "housing economy?"

  8. Royce commented on Aug 29

    You have to wonder how much an expected slowdown is priced into the market. When you see a good number of managers on always-bullish CNBC talking about a coming downturn, you have to figure that a least a portion of the market has lowered profit expectations. Is it possible that we’re at that point where a lot of people (excluding permabulls) expect a downturn but differ on how bad it’s going to be?

  9. Mark commented on Aug 29

    I read the minutes. No real surprises there but the overall tone was a lotta confusion and a lotta hope. So let’s rally this up!

  10. babycondor commented on Aug 29

    Perfect description of the current zeitgeist (not just in the markets): confusion and hope.

  11. permabull commented on Aug 29

    Michael C,
    I don’t want to whiteant a post on this topic which I’d like Barry to write -but here goes.
    I think Barry’s right about a large downturn in housing – the busts always seem to be 50% when they come and they last a few years.
    This one won’t be any different – and he’s probably right about the consumer being tapped out for a few years.
    That happened after the 73/74 bust – the next 4 or 5 years were murder for building materials and home furnishing companies.
    My interest is only in individual companies – but after the 73/74 bust, consumers put their hands in their pockets and wouldn’t take them out for 4 or 5 years.
    Masco is a good example – always been a well run company – it got through 1966 and came back quickly. But after 1972, it just went sideways until 1980 – you lived off the dividends and what were good earnings until people got confidence again.
    I don’t see a 1973/74 just yet – because Housing seems to be out of synch with the rest of the market for the first time in my life.
    Funnily enough, I do see more of that grinding go- nowhere environment much like 76 to 79.
    What happened was the companies adapted as best they could and earnings kept grinding higher – but nobody wanted to know.
    So, the value just slowly got better and better – to a point where – even with people scared about interest rates and inflation – you just had to start buying some of these companies.
    So – that’s my best guess for the next few years.

  12. S commented on Aug 29

    My theory about the recent strength is that “the crowd” in general and the “cycle theorists” in particular were planning to get more bullish in late Sept./Oct. to participate in the traditional 4Q rally. After the FED pause and the positive surprise in PPI and CPI, other market participants decided to be brave and front run “the crowd” and the “cyclists”.

    With so many people either on vacation or bearish, these fringe guys took ‘em higher during the weakest volume month of the year. Today, I hear on CNBC that this August was the second best in the past 10 years. So how do the hedgies and mutual fund guys with sub-par year to date performance respond? Feeling pressured, they chase them. Just a theory.

    It will be interesting to see if, when the A-team returns next week, they continue to rally them, afraid the 4Q rally started a few weeks early. Kinda feels that way to me. After all, performance bonuses are at stake.

    Then 1Q07 will be primed for the big flush.

  13. kevin_r commented on Aug 29

    Could someone tell me the number for the Reuters/Jeffries CRB index 5-year uptrend? From the chart above, it seems to be about 320.

  14. Ryan commented on Aug 29

    The only doubt I have about this slowdown becoming deeper is that the stock market is not declining. A big stock market decline usually foreshadows a coming recession 6 months in advance and that is not happening this time.

  15. andiron commented on Aug 29

    that is true, john..Barry had dissed LEI as voo doo stuff…now that it seems to agree w/ his notion, he grasped onto it…
    come on Barry, we all follow your words like a hound..
    Of course, I am all cash.

  16. Mark commented on Aug 29


    IMO that is because the data on the consumer so far is mixed. If consumer spending data starts to exhibit a marked decline, then the market will follow.

    I continue to be amazed at the market’s “resilience” and today’s rally from no news/somewhat bad news in the FOMC Minutes is just another example. The minutes placed a very clear emphasis that the lowered inflation expectations were due to “below trend” GDP growth expectations for the next 6 quarters. Those figures are on a downward revision path. That’s somehow good?

  17. Barry Ritholtz commented on Aug 29


    I specifically noted: “Even the reconstituted Leading Economic Indicators have continued to weaken.”

    The key word is “reconstituted” — had the conference board not screwed around witgh them, the LEIs would be even more negative.

  18. Cherry commented on Aug 29

    The market is being forced up for the big kill. It is like saying your going to one of those fancy new poorly built homes where your father didn’t die of a heart attack and your sister of cancer. Where everything is sunny, dry, green and warm. Where everybody is friendly.

    But when the shadow opens up the door, you find your father dead, your sister dead and everybody hates you……………………and there are 1000 bears ready to eat you for dinner.

    So far, everything I have forseen has gone as planned. One last staged rally late summer that tries to break the high and when it reaches that point, it will be like falling from a cliff. A prophecy so to speak. Maybe it will just be nasty correction. Maybe it will be the beginning of the end of the golden years and the start of a new dark age. But when it comes, the people with those types of instincts will see the decline, others won’t. That is what seperates the best with money to the not so best.

  19. Mike commented on Aug 29

    Mark and Ryan,

    According Bill Fleckenstein, this back to school season was pretty bad mainly due to low traffic in stores. If this is true, SSS released later this week should show consumer weakness, and the weakness should affect upcoming earnings as well. Time will tell.


  20. Damian commented on Aug 29

    Erik wrote: “i hope that our housing market mimics what happened in britian over the past two years. their rate cuts were about one year ahead of ours and their housing sector cooled, recollected itself and began trucking again this year. there’s proof in the pudding of a soft landing and there’s room to think we may benefit from their telemarking the controls.”

    Does anyone know the makeup of the mortgages in England? Are they as loaded to the gills with ARMs as we are?

    I agree that England is an interesting model, but most smart people I know think the BOE has been much smarter than the Fed in terms of raising earlier. Thoughts appreciated!

  21. financialrx commented on Aug 29

    just two cents here:

    a) I noticed this morning on minyanville ( a reference to new records in NYSE and Nazz short interest. Me thinks lots of hedge funds decided the Sep/Oct Crash would be a layup. That many folks crowded over on one side of the boat can be good for a spike- maybe even a giant one- but if you blow out the shorts that’s historically a recipe for the big ugly type declines afterwords.

    b) and speaking of big ugly, Nouriel Roubini goes postal here in his update to his recession call: That one is a long read but I think it’s worth plowing thru.

    sorry if these were already mentioned.

    oh, and just a side note: a and b are NOT mutually exclusive (remember that last thousand points in the Nazz before the bottom fell out?).

  22. anon commented on Aug 29

    why anyone thinks public sentiment is a useful predictor of the economy is beyond comprehension

  23. A Dash of Insight commented on Aug 29

    Economic Strength?

    The indicators for economic strength should be a factual matter. One might write them down and then monitor them. Many economists take this approach. This week will see several important government reports on the economy including the second quarter GDP

  24. Russ Winter commented on Aug 30

    The weaker consumer confidence report demonstrates in spades, that it is inflationary fall out more so than anything else, that is causing the hurt. Gasoline has become the Ministry of Truth’s “my dog ate the homework” scapegoat for generally higher costs across the board. Nor is a ten cent drop at the pump going to save Joe Soccer Mom. This is not something that is cured by the standard Keynesian medicine of feeding more liquidity to Bullies and Pig Men, or by words in FOMC “reward speculation” minutes, or by waiting for “data” . From the confidence report:

    Americans’ expectations for the inflation rate 12 months from now rose to 5.5 percent in August from 5.1 percent in July. It reached a high this year of 5.6 percent in May, the Conference Board’s figures showed.

  25. JGarcia commented on Aug 30

    “The data keeps coming, and its getting harder for the perma-bulls to rationalize the information.”

    Barry can you please comment on the massive Capex just mentioned by Mike Thompson? There has been huge skepticism that Capex might help fill in the consumer’s slowdown. Can the market be reading this correctly by rallying right into the teeth of the constant 4 year cycle calls?


  26. jim commented on Aug 30

    I have a 60′ X 40′ building full of pretty good leftovers from a recent move to a smaller house. Up until about 2 months ago sales were brisk via local newspaper ads. Now we get no action on anything at any price. Makes me think the average consumer is toast.

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