Confidence Dives Off A Cliff
Consumer confidence fell 14.3 points to 79.4, a level that has not been seen since November 1993 when the economy was coming out of the last recession, and was the biggest drop since 1990, excluding the reading resulting after the terrorist attacks last year. While the top line number grabbed all the headlines, and for good reason, the real story is how widespread the weakness was throughout all the components and other survey questions. Consumer confidence peaked in January 2000 and last bottomed in February 1992. Below is a table containing the different indexes published by the Conference Board at each period and the decline from the peak in January 2000.
|Index||Oct.||Sept||Jan 2000||% Change||Feb 1992|
|Jobs Not Plentiful||57.9||58.7||33.6||+72%||46.7|
|Jobs Hard to Find||27.3||25.4||11.2||+144%||48.9|
|Expect more jobs in 6 mths.||15.0||17.3||16.5||-9%||12.7|
|Expect fewer jobs in 6 mths||22.1||16.8||9.7||+128%||32.9|
|Expect income to increase||17.8||21.5||26.6||-33%||18.4|
|Expect income to decrease||11.4||8.9||4.7||+143%||14.7|
|Plan to buy car||6.8||7.2||9.8||-31%||7.0|
|Plan to buy home||3.1||3.3||3.9||-21%||4.2|
|Plan to buy appliance||27.9||26.2||29.0||-4%||29.9|
|Business conditions good||15.6||18.5||47.3||-67%||7.9|
|Business conditions bad||27.6||23.8||8.3||+233%||48.6|
|Expect better in 6 months||19.0||21.6||20.0||-5%||16.8|
|Expect worse in 6 months||14.1||9.7||3.5||+303%||21.4|
While confidence has declined substantially for almost three years, there still remains significant downside to get to previous lows in confidence. In fact, since the 1973 to 1975 recession, every other period of economic contraction has not ended until confidence has slipped into the 50's.
Unfortunately, it is difficult to present all this data concisely. The number that plan on buying a home dropped only by 0.2. However, except for one month in 2000, this is the lowest number since 1997, and could be starting another downturn after being range bound since 2000. Beginning in 1998, the number planning to purchase a home increased from between 2.5% and 3.5% to between 4.0% and 4.5% with a couple spikes to about 5%. It then declined to a 3.3% to 4.2% range at the end of 1999 where it has since been range bound. This ominous sign of a potential slowdown in real estate sales comes when everyone is counting on housing to prop up the economy, hoping the last pillar does not falter. It also coincides with an increasing number of homes for sale. Last week, the According to the National Association of Realtors reported that there are 2.35 million single-family homes for sale, which is the highest level since June 1998. Economists quickly point out that because the number of homes being sold continues at a record pace, which makes the number of months of inventory on the market lower, the inventory build is no problem. Yet economists seem surprised by how quickly consumers started to curtail spending. It is just as likely that consumers will turn off the home buying plans as well. The consumer confidence number along with the recent decline in the Mortgage Bankers Association Purchase Index, as mortgage rates hit record lows, might be a prelude of coming weakness in residential real estate.
Looking at the difference between the number expecting income to increase verses the number expecting income to decline yields an interesting chart. During the good times, approximately 20% more people expect their incomes to increase than decrease. Currently, the difference stands at only 6.4%. The lowest ever reached was in August 1993 when only 2% more people thought their salary would increase than decrease. Whether or not this can forecast economic strength or weakness, I'm not sure. It did start weakening in February 2001, which coincided with the first quarter of negative GDP growth occurring in the first quarter 2001. It also started weakening in July 1990, which also coincided with the first negative quarter of negative GDP growth.
Economists discounted the weak consumer confidence report by saying that the survey has not been accurately reflecting how consumers are acting. That has been accurate, but have they looked at recent retail sales data? Clearly, there has been a noticeable decline in consumer spending that is now also being reflected in the survey results. This will definitely worry retailers for the upcoming holiday shopping season.
Earnings for the third quarter beat analysts' estimates, but that should not be a catalyst for the recent stock market rally. Earnings usually beat estimates by about 3% according to First Call. As of last Friday earnings are about 3.1% better than the final estimates, with Microsoft accounting for a substantial portion of that. When all is said and done, First Call expects the final earnings tally to beat the final estimate by the historical average of 2.8%. First Call notes that estimates are usually trimmed by 2.8% from the beginning of the quarter to when companies begin reporting results. This matches what companies actually report, so companies generally earn what analysts expected at the beginning of the quarter, before having estimates "talked down." In the case of third quarter earnings, estimates were substantially reduced. At the beginning of the quarter estimates were calling for over 16% growth, which was slashed to only 4.9%. So actually earnings are still almost 10% below what analysts expected just three months ago. It is also important to remember this is verses very weak year-over-year comparisons.
The rest of the year will be very interesting as evidence mounts that the consumer has starting to retrench. It is quite clear that businesses are not in a hurry to buy capital equipment. Right now the economy could disappoint most analysts and economist. Analysts expect S&P 500 earnings to grow 17% from last year, and very few economists are forecasting another contraction in GDP.