Wednesday, November 28, 2007

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).

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.


  1. In my experience, cutting down spending is rather easy for any middle-class person. The essential (housing, food, transportation) are not that expensive. One can go without so many new clothes, new gadgets, and new cars for quite a while.

    I did cut down my spending by some 40% - and now I could take some extra vacation next year.

  2. Dear Hellasious,
    I would not say that manufacturing is outsourced. Part of it ok. a bigger part today than before ok. But not all. however I think that your thoughts go in the right direction. a lot on depends now on outside the US. My thought : the outsourcing to China has allowed the US to benefit from low inflation (no labour cost pressure) but to suffer from loss of jobs and revenues, albeit slightly compensated by cheaper imports than domestic products. Now that China is experiencig inflation, the US risk in a boomrang effect to suffer from imported inflation (from china). The Fed should be based no only in Washington but in Peking !

  3. To my uneducated mind this seems like a contrarian having a field day

  4. "The essential (housing, food, transportation) are not that expensive."

    Holy crap...what kind of world are you living in? These "essential" costs consume most of the middle class take home income. I spend more than half of my of my take home pay for housing&utilities and about 20% for car payments and gas. Food costs are going through the roof( I have 3 kids to feed).And then there is the increase in medical insurance premiums...

  5. The real economy lags the financial system. Or at this point maybe the real economy is the financial economy. As long as credit is given to everyone we can have economic nirvana.

    One thing that is bothering me about gas and oil is this is the time when gas prices should really matter because before there was enough credit to get gas from cc or home equity. Those are going away.

  6. Dear anon. (with link)

    I followed the link but I do not see your point. It was a general market report for Asian shares. Maybe you provided the wrong URL?



    Certainly not all mfg. has been outsourced. But we live in a world dominated by Adam Smith's invisible hand, i.e. MARGINAL supply, demand, prices and other economic factors are what really matter for the wealth of nations.

    There is no denying that the trend has been to off-shore more and more of the US economy in order to fatten corporate profit margins at the expense of Americans' earned income. This is so incredibly short-sighted, under the circumstances...The corporations are destroying their best customers.


    Increasingly, the US economy has been assetized, financialized and derivativized. I have never seen more attention paid to "markets" in my entire life, except the brief madness of the crowds during the dotcom era. But that was well understood by the Wall Street elite to be a super-sucker era.

    Today it is the elite that looks at nothing but the ticker.

    Regards and thanks to all for your comments.


  7. Well, I live in Finland, rent a 50 sq meter apartment with my wife, commute by bicycle or by bus. Rent and utilities (district heating included in the rent, electricity some 15 euros a month) are less than 25% of my take home salary. Commuting is about 1%. Food, simple food, cooking myself, maybe 15%.

    Of course, should I want to have 100 sq meter house, a car or two, I would be in financial trouble.

  8. Here is the URL again

    1000% hedge fund wins subprime bet

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