Tuesday, June 30, 2009
Consumer confidence came in much lower than expected at 49.3 versus expectations of 57. This decline represents the schism between the green shoots theorists and the real economy. Consumers simply aren’t recovering as high gas prices persist, wage deflation sets in and job losses mount.
this is a disappointment which, at least so far this morning, has sent an overbought market reeling a little bit. but i'm not entirely sure that it should be read as a negative.
i've noted before that likely the meaningful measure is the differential between future expectations and present situation. this measure is at its wide going back to 1993 (not shown, but jim stack has run this back to 1967). while the aggregate confidence number tends to fall throughout a recession and lag the stock market, a sharp rise to meaningfully positive readings accompanied the 2003 stock market lows, and ordinarily lead the end of a recession.
but there is a potential sticking point. while the future expectations component is now well off the floor and touched 71.5 last month, that is approximately the level reached at the floor in 2002-3 -- in other words, 70 is still a damned sour outlook.
using economagic one can see that trough expectations in late 1990 were as low as 55; in 1980 as low as 50; december 1973 touched 45. that's some excellent context for the recent unbelievable readings in expectations, which -- after breaking records in october 2008 at 35.7 -- absolutely fell down the stairs to an all-time low of 27.3 in february 2009.
the $64,000 question is whether such low readings of expectations demonstrate a systemic shock that will simply take longer to recover from. it may be worth noting that, in each of these earlier instances of extremely low readings of expectations, the recession tended to drag on -- 1980 was prelude to the infamous double-dip that didn't resolve until the end of 1982, and it took until the middle of 1975 to emerge from the big recession of the seventies.
what's more, most jaundiced observers would tell you that, whereas present situation is something of a coincident indication of the employment picture, the expectations index is in large part a reflection of recent equity market performance. it is highly likely that we are seeing a jump in expectations now mostly because the market has rallied. if that rally craps out, as anticipated by several savvy observers? chances are the effect on expectations would be devastating. one can note, for example, that the december 1973 nadir was followed by a bounce in expectations that ran up to around 90 in the summer of 1974; this coincides exactly with a bear market rally similar in duration to what we've experienced recently -- the dow industrials rallied from 53.65 on christmas eve 1973, off nearly (-25%) from the highs, to 58.22 in mid-march 1974 and holding in the 54 area through summer. but as the market then collapsed back to 35 into october 1974, so did expectations -- pegged back down to 50 in october and december of 1974.
in any case, i'd wait to see how expectations behave on a correction of the big march-june equity upswing. it's hard to imagine lower lows in expectations, given how very low the recent readings were. but there are plenty of bank failures ahead, more house price deterioration and perhaps even some nasty turbulence in global credit markets provoked by events in europe. as was illustrated by a shockingly poor first quarter GDP reading for the UK, it's perhaps harder to stimulate one's way out of this manner of economic trouble than it commonly believed.
UPDATE: zero hedge with an excellent correlation chart matching the S&P to the consumer confidence headline number -- which incidentally verifies how confidence tends to be led around by the stock market -- and notes a divergence.
The last time we got a -2.42 standard deviation between confidence and the market, things got real ugly, real fast.