CONSUMER CONFIDENCE IN THE DOLDRUMS

The Conference Board’s consumer confidence index may have improved (48.7 in October to 49.5 in November) and beaten consensus expectations, but it remains firmly in recession terrain. It is so obvious that consumers are tired of the over-borrowing and over-spending days of yesteryear. Despite all the temptations provided by the government, auto buying plans dropped to an eight-month low (from 4.7 in October to 4.4 in November); home buying plans slipped to a new 27-year low of 2.3 (from 2.5 in October and 3.0 in September); and intentions to buy a major appliance stayed at a 14-year low (23.2).

Source: Haver Analytics, Gluskin Sheff

Source: Haver Analytics, Gluskin Sheff

When we first introduced the theme of U.S. consumer frugality well over a year ago, it was met in many circles with guffaws …

Again, those expecting much better things from the labour market were probably not happy to see the job sub-indices in this report either; jobs hard to get (49.4 in October to 49.8 in November) and jobs are plentiful (3.5 to 3.2) hit their worst levels in 26 years.

In terms of financial markets, and this is a good contrary indicator, those expecting the equity market to go up (33.1 to 36.3) and those expecting it to go down (28.7 to 23.8) have moved to levels last seen in July 2007 (right when the market was peaking out and about to roll over).

Interest rate expectations, meanwhile, have moved in a bullish direction for bonds. Those respondents expecting yields to rise went from 50.1 to 51.3 in November and those expecting yields to fall slipped from 15.3 to 12.9 — levels last posted in August 2007 in what were the early stages of one of the biggest bond rallies in the past 30 years.

When we first introduced the theme of U.S. consumer frugality well over a year ago, it was met in many circles with guffaws. But indeed, Americans do have resolve and do have the ability to live within their means. Have a look at the front cover of the USA Today — The Spirit of This Season: Be Thankful, Spend Less. The column spoke to us because we do not measure success, as so many other economists do, by how much the consumer borrows and spends (also have a look at Cheap and Cheerful for the Holidays on page B3 of the NYT). Rather, saving for retirement and education and ensuring that our kids (and parents) are looked after is what counts. Not to mention charity.

This notion that the GDP data was disappointing in Q3 because it was led by a downward revision to consumer spending totally misses the point. But what also misses the point is government policy that continues to focus on reflating the housing stock, which carries with it no future productivity potential and job creation. More creative ways to encourage a revamp of the nation’s capital stock, especially now that capacity growth is completely stagnating in the manufacturing sector, would, in our view, be a much wiser approach for how fiscal policymakers should be allocating taxpayer funds to get the economy moving again and yet derive some future rate of return at the same time.

Housing policies may make for good politics, but not necessarily the best economics, especially considering the fact that no other sector receives as much preferential tax treatment as the homebuilding sector.