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Consumer Gloom Is Real!

  • Written by Syndicated Publisher 43 Comments43 Comments Comments
    October 21, 2011

    Yesterday the NY Times posted a commentary with the speculative title Gloom Grips Consumers, and It May Be Home Prices. The article appeared in print this morning, and it has been widely circulated around the Internet, notably by CNBC. The text is filled with poignant stories of personal struggles since the housing peak and subsequent Financial Crisis.

    Interestingly enough, today CNBC also published a Reuters item — one (like this commentary) with a question tease as the title: Has Market Sentiment Diverged From Reality?

    Predictably enough the Reuters piece takes an ambivalent view, but it includes the obligatory warning that negativity could “push the global economy over the edge.”

    Consumer sentiment and small-business-owner optimism are topics I track monthly on this website, and my view of the data puts the secular peak in confidence much earlier than the crash in housing prices and 2008 Financial Crisis.

    Check the charts below for the all-time high in consumer confidence, whether you use the Reuters/Michigan Consumer Sentiment Index or the Conference Board Consumer Confidence Index.

     

     

     

     

    Both show that confidence peaked in 2000 — well before the housing-bubble peak in 2005, and the market peak in 2007, and of course the Financial Panic of 2008. The Small Business Optimism Index, which has a substantial residential real estate component, was buoyed by the housing bubble. It peaked in late 2004, just before the major housing indexes topped out.

     

     

    When we look closely at these confidence indictors, we see that the shift in mood began well before the events focused on in the NY Times and Reuters articles.

    There is, however, another key data series that better matches the contours of the consumer confidence charts, namely the trend in real (inflation-adjusted) household earnings.

     

     

     

     

    As these two charts illustrate, the 21st century has witnessed a loss of purchasing power for most households (other than retirees living off Social Security). The reason is a combination of reduced nominal incomes and the impact of inflation. In fact, the average income for U.S. households in their peak earning years has fallen over 13 percent in real terms since the beginning of the new millennium.

     

     

    There is no question that the decline in home values and the festering wounds of the Financial Crisis have both contributed significantly to the decline in consumer confidence. But the origin of the grim mindset of the U.S. consumer correlates with the sustained erosion in household incomes that began years before events discussed in the NY Times and Reuters articles.

    The consumer has been experiencing a prolonged bout of tunnel vision. And if real household income is a key cause, there is not yet a hint of light in the distance to mark the end.


    Note from dshort: Here are links to my latest updates on confidence indicators and household incomes:

    Images: Flickr

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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