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Monday, May 19, 2008 11:03 AM


Consumer Sentiment: Is the Worst Yet To Come?


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Consumer sentiment continues to sour, with readings the lowest in nearly three decades.

University of Michigan Consumer Sentiment



click on chart for sharper image
The above chart courtesy of the St. Louis Fed.

Horrific Trends

From Bloomberg:

"The trends are horrific," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, who had the closest housing-starts estimate in Bloomberg's survey. "There's just no reason things are getting any better. Why would you buy a house? Why would you spend money to buy a depreciating asset?"

Consumer Confidence Drops Anchor

Professor Kevin Depew was talking about Consumer Sentiment last week in
Consumer Confidence Drops Anchor
. Inquiring minds will wish to take a look.

Where's The Bottom?

Inquiring minds just might be asking "Where's The Bottom?" It's a good question. And to help find the answer let's consider a couple of charts, by permission, from a Contrary Investor article from earlier this month: Spoken In Confidence.

You don't need us to tell you that the US consumer is under meaningful pressure as of late - energy and food price inflation, lack of household asset inflation (real estate and stock prices), tightened credit availability, and wage growth below the headline CPI rate. So it's really not all that surprising that the current consumer confidence reading sits quite near its prior cycle bottom in 2002. Do we ultimately make it back to the bottom seen in the early 1990's or early 1980's?

We'll see, but we would not be surprised at all. In fact, at least as of now, we believe the confidence number gets worse from here. Why? Have a look at the chart and we'll have a comment or two.



click on chart for sharper image

The important issue is that in every cycle, the year over year rate of change in payroll employment has bottomed either prior to, or with the consumer confidence numbers. In fact, in the early 1990's and early this decade, the year over year change in payroll employment bottomed close to a year ahead of the consumer confidence number.




click on chart for sharper image

Although the annual rate of change in US payroll employment has been in decline for well over a year now, it has only been in the year to date period that the data for the component of the consumer confidence report that measures jobs hard to get and plentiful crossed paths, with jobs plentiful declining meaningfully and jobs hard to get data rising faster than anything we have seen since 2002.

As you can see, both of these have decisively broken their prior four year trend lines. The important issue now will be to look for a peak in the jobs hard to get data and a trough in the jobs plentiful measure. But as of now, these two are accelerating in terms of the in place change in trend. For the US consumer and US economy to be back in gear to the upside by year end, these two confidence components regarding employment are going to need to change direction and fast.
Finding Bottom Is A Process

There have been four consecutive months of negative job growth. I spoke of this in April Jobs - Another Report From Bizarro World.

Consumer sentiment is unlikely to improve until jobs improve.

However, don't expect that to happen anytime soon. Banks and brokerages are scrambling to raise capital and reduce expenses. Layoffs in the financial sector are massive, but are about to get worse. State budgets are strapped and many states are reporting dramatic falloffs in tax revenue. California is in particularly dire straits as noted in California Leads Way To Consumer Bust. States will have to raise taxes or cut services (jobs), most like both.

Commercial Real estate will add to the downward spiral now that the Shopping Center Economic Model Is History. The auto sector is in deep trouble thanks to the Death of the SUV.

Those buying into the idea of a "second half recovery" are singing the wrong tune. Overcapacity is rampant everywhere you look. There is no reason for businesses to expand, so they won't. Thus, unemployment is poised to rise and consumer sentiment is poised to sink further.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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