Consumer Confidence ‘Unexpectedly’ Falls

This from Bloomberg today:

“Confidence among U.S. consumers unexpectedly fell in October for a second month as Americans fretted about a lack of jobs.

The Conference Board’s confidence index dropped to 47.7 from a revised 53.4 in September, a report from the New York- based private research group showed today. A measure of employment availability deteriorated to a 26-year low.

Mounting unemployment threatens to restrain consumer spending entering the Christmas-holiday shopping season. Without a sustained rebound in the biggest part of the economy, the emerging recovery may fall short of expectations.

“There really isn’t any scope for us to see sustained gains in consumer spending for quite some time,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. “The labor market remains very weak.”

Unexpected?

Not for me.

I’ve been writing for most of the year that the economy is not going to recover until excess debt is dealt with. I believe this ‘recession’ is a credit driven recession rather than the more common inventory driven recession. That means until the excess debt is dealt with – either paid down or defaulted upon – the economy can’t “truly” recover.

The consumer is clearly uncomfortable. Despite the government’s best efforts to get consumers to spend, the average consumer is saving and paying down debt. News reports indicating job losses are slowing does not offset the fact unemployment continues to rise. Job losses are still job losses and in spite of the talk of a ‘jobless recovery’ by many pundits, consumers as a whole aren’t buying it.

Just in case you’re wondering how the Consumer Confidence Index measures consumer confidence, each month approximately 5,000 representative US households are surveyed and asked how they feel about the economy. The results are then tabulated and an appropriate number is assigned to that month’s index.

A sub-index that’s part of the Consumer Confidence Index is the Present Situation Index. The Present Situation Index comprises about 40% of the Consumer Confidence Index. The Present Situation Index is defined by Investopedia as follows:

The Conference Board conducts this survey, in which participants are asked if they feel that current business conditions are good, bad or normal, and if they feel that current employment conditions are plentiful, not so plentiful or hard to get.

The Present Situation Index is at a 26-year low. Consumers are simply becoming more negative; strangely enough at the same time many investors are becoming more positive. This from ‘Inside Futures’ today:

There were 49.5% Bulls versus 23.1% Bears as of 10/21/09, according to the weekly Investors Intelligence survey of stock market newsletter advisors. The Bull/Bear ratio was 2.14, up from 1.79 the previous week. The ratio was 2.61 on 8/26/09, the highest reading since 10/17/07.

Strange dichotomy isn’t it?

Who’s right? Consumers or investors?

I’m siding with the consumers. As I outlined in my October ‘Moving Markets’ newsletter, I believe this rally is a bear market rally for many reasons, the main one being diminishing volume. If you look at the chart below, you’ll see what I mean. Notice how prices have risen but volume has contracted.

To obtain a copy of the October Moving Markets Newsletter, visit www.usawealthmanagement.com.

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