Consumer Confidence and Contrarians

The Consumer Confidence numbers were released yesterday by the Conference Board and they showed that the US consumer is finally losing some faith in the rosier-than-thou view that all will be well despite collapsing real estate prices (down 4.5% in the third quarter), fuel and food inflation running out of control and household debt at an all time high. The headline index dropped to the lowest level in two years (chart below).

Charts: Market Harmonics

Of more significance is that consumers' views about their future declined dramatically. The Expectations Index plunged from 80 to 68.7, closing in to levels last seen during the second Gulf War in 2003 (chart below).


Now, there are those that will view this from the contrarian angle and argue that this is an indication of an approaching bottom. I am a dedicated student of contrarian principles myself, but I would be extremely cautious of such interpretation, right now: notice that the main index is still much higher than its 2003 low. The reason is that consumers are still quite confident about the present (chart below). True "panic", that condition so beloved of us contrarians, requires that people are scared about their future and present.


My opinion is that consumers will continue to adjust their current spending lower over the next several months, to reflect their growing negative expectations for the future. For as long as they still have some ready money and credit available they will spend, but increasingly cautiously because their concerns for the future will "color" their decisions and act as a brake, a "spending inhibitor". At some point the two views should merge, producing equally grim public opinion for the present and the future.

Nevertheless, this is clearly not the case right now, so it is still too early to call a "panic". No one is throwing in the towel and least of all the consumer, if we are to judge by the "lunatic" behavior during the midnight shopping madness that gripped the nation a few days ago. People are still rushing to buy the latest doodads, provided they can get them at steep discounts. Their dialectic has definitely not yet shifted to: "save as much as you can because there are hard days ahead". Yours truly, a dedicated contrarian, will await for this to happen at the very least, before starting to look for bottoms.

The main reason for this relatively robust showing of the Present Situation index is that employment, though weakening somewhat, is still quite resilient. The quality of the jobs involved is not excellent and their numbers are inflated by the statistical methods used, but there is no denying that overall unemployment is still low. But.. let me share a thought that popped into my mind as I left the supermarket yesterday.

I noticed that people are increasingly opting for no-name or budget brands; this is a natural trading-down response to price hikes and tighter budgets. I expect that this is going to have significant knock-on effects to the US economy specifically, dominated as it is by the service sector. Switching to no-name products and shopping at lower-tier stores is going to remove swathes of jobs in advertising, marketing and promotion, packaging design, retailing, etc.

Our economy is now dominated by such services and so is employment. The days are gone when a slowdown precipitated immediate layoffs in plants and a rapid plunge into recession - manufacturing has been off-shored. We are now vulnerable to losing "software" jobs more slowly, instead of losing "hardware" jobs faster. Whereas in the past a factory faced with slower orders and high inventories would immediately cancel a shift laying off 5.000 workers at one go, today we will have a grinding, drawn out process as thousands of smaller entities let go of several people here and there. But taken together, these job losses are going to be very significant and, unlike factory jobs, these kinds of jobs won't be fast at coming back, either.

In sum, employment is a lagging indicator, now more than ever. Given that jobs influence consumers' present attitudes more than anything else, I think we have a long way ahead of us before contrarian thinking enters the picture.