The Consumer: Easy Pod – Feeling a Little Less Bad, But Most Accurate Indicator Says Getting Worse (Dec 20, 2011)

This first section is the same intro I have each time for this Easy Pod, so skip ahead to the indicators if you’ve already read it.

I’m continuing with a feature I’m calling “Easy Pod” – a collection of indicators that help portray the current status of something.  In this post, that something is the consumer.  Let’s first review quickly what a consumer is, and why this matters.

Quick ‘n Easy Consumer spending makes up about 70% of our economy, so we care deeply about how they are doing.  Although intuitively it makes sense that a more confident consumer would spend more, it turns out that income is a bigger factor.  Still, the consumer’s confidence and sentiment are good coincident indicators of how the economy is doing.

From Merriam-Webster Dictionary:

Consumer = one that utilizes economic goods

We talk a lot about the GDP (Gross Domestic Product – Easy Intro to GDP) as the accepted measure of overall economic activity.  Well, guess what makes up about two-thirds of that economic activity?  That’s right, laundry detergent purchases.  Just kidding.  It’s consumer spending.  That’s me, you, your neighbor … every one of us is a consumer, and the more we spend, the better the economy is generally doing.

Naturally, there is a huge interest in knowing how consumers are feeling.  Are they confident about their financial health, which would mean they are more likely to make big purchases like cars, appliances, vacation packages, etc.?  Or are they extremely concerned about losing their jobs or having their homes decrease in value, which might make them put off those purchases and even spend less at the grocery store?

To assess these kinds of things, there are countless indicators of the health of the consumer.  In this “Easy Pod” I will take a look at a few different indicators related to the consumer that I like to follow.  Check back regularly for updates.

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Indicator: Daily Consumer Leading Indicators (Consumer Metrics Institute)  |   NEGATIVE
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: Dec 17, 2011

Quick ‘n Easy Consumer spending makes up about 70% of our economy, so an indication of what this spending looks like down the road is key in predicting growth rates.  The level of interest from consumers in making discretionary (non-essential) purchases in the near term, as captured by the Consumer Metrics Institute on December 17, was about 17% below a fairly normal level seen in the year 2005.

Easy Description: Very unique indicator that captures the level of consumer  interest in purchasing discretionary (non-essential) items.  It measures activities that occur well in advance of the purchase, so that makes it a true leading indicator.  The indicator that I choose to focus on is called the “Absolute Demand Index.”  It tracks where demand is compared to levels in 2005, a fairly normal level.  So, if the Absolute Demand Index level is 90, it means the level of consumer interest in purchasing discretionary items is 90% of what it was in 2005.  The index is expressed in a daily form (see chart to right) and a monthly form (see chart below.)

Latest Reading: Absolute Demand Index daily reading is approximately 83 for December 17, which means preparations for consumer discretionary purchases is 17% below the levels back in 2005.

This index began surging around May or June from down around 78 but now appears to be making a pronounced downward move.

Implications: There is a clear downward movement since Dec 1.  The author of the index has offered that the big drop from late October was due to the drop in consumer discretionary income (the amount of money consumers have left over to spend on whatever they want after paying for mandatory things like housing, food, medical expenses, etc.).  Because the daily numbers temporarily improved starting around Thanksgiving, perhaps consumers abandoned that mentality briefly for their early holiday shopping.  But it appears things are going back to where they belong, which is a bad place.

Easynomics Rating Methodology: For this index, if the daily Absolute Demand Index is 98 or higher, I will rate that “positive” – between 90 and 98 will be “neutral” – below 90 will be “negative.”

 

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Indicator: Bloomberg US Weekly Consumer Comfort Index   |   NEGATIVE
Easy Intro: None yet  |   Link to Source: Click here   |   Latest Date This Info Represents: Dec 11, 2011

Quick ‘n Easy A survey of what consumers think of the U.S. economy, whether they are going to be making purchases, and how they are doing with their own finances shows that they are doing just as poorly as they were four months after the financial crisis of 2008 hit.

Easy Description: Survey showing what consumers think of the U.S. economy, whether they are going to be making purchases, and how they are doing with their own finances.

Full Description: From Bloomberg’s website:

“Based on Americans’ ratings of the national economy, the buying climate and their personal finances, reported in a four-week rolling average of 1,000 random-sample telephone interviews of about 250 consumers a week aged 18 or over.”

Basically, they are asking consumers how they think the US economy is doing, how likely they are to be making purchases, and how their general finances are going.  They average the responses over the last four weeks.  Also note that this basically takes the positive responses minus the negative responses to calculate a net.  The maximum overall reading is +100, the worst is -100.

Latest Reading: minus (-) 49.9

Implications: Since May 2008, the range has been between -52 and -41 basically.  The consumer hasn’t been “comfortable” in years apparently.

Easynomics Rating Methodology: For this index, I will rate values between +33.3 and +100 as “positive” – between +33.3 and -33.3 as “neutral” –  and below -33.3 will be “negative.”

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Indicator: Consumer Confidence Index (The Conference Board)   |   NEGATIVE
Easy Intro: None yet   |   Link to Source: Click here   |   Latest Date This Info Represents: November 2011

Quick ‘n Easy When asked how things are going for them now and how they think things will be going in six months, consumers were as pessimistic as they generally are during a recession.  Confidence levels have stayed extraordinarily low for consumers for quite some time.

Easy Description: Consumers answer two basic economic questions: 1) How are things going for you now? and 2) How do you think things will be in 6 months?

Full Description: According to The Conference Board, this is a “barometer of the health of the U.S. economy from the perspective of the consumer. The index is based on consumers’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income.”

So, basically they are asking consumers how things are going now and how they think things will be in six months.  The final number doesn’t represent anything specific – it is basically an index.  So, what’s important is whether it goes up or down and how it compares to other readings.

Latest Reading: 56.0 (versus 39.8 the month prior) – see chart from Dshort.com

Implications: There was a huge improvement from October to November, but that still leaves consumer confidence at an extraordinarily low level.  That should tell you just how bad things had gotten in October!  The latest reading is a whopping 32 percent below where the trend suggests (the red line in Doug Short’s chart above.)

Easynomics Rating Methodology: For this index, I will compare the latest reading to the expected level based on a regression line drawn by Doug Short.  If the latest reading is 2 percent below that line or better, I will assign a “positive.”  If it’s between 2 and 8 percent below the line, I will give it a “neutral.”  If it’s worse than 8 percent below that line, I will give a “negative” rating.

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Indicator: Consumer Sentiment (University of Michigan)   |   NEGATIVE
Easy Intro: None yet   |   Link to Source: Click Here   |   Latest Date This Info Represents: December 2011 (preliminary report)

Quick ‘n Easy A survey of consumers asking what they think of the economic situation (present and future outlook) as well as their own financial situation (present and future outlook) finds consumers feeling very, very bad.

Easy Description: See below – “Full Description” is pretty easy!

Full Description: There are two basic questions addressed by this telephone survey of consumers covers.  How do consumers view their own financial situation (currently and in the future)?  How do consumers think the economy is doing (currently and in the future)?  The results are an index, so they don’t actually mean anything other than a way to compare to other readings from other months.

Latest Reading: 67.7 (versus 64.1 for the prior month) – see chart from Dshort.com

Implications: The increase in the overall index was due solely to an improvement in consumers’ future outlook.  That’s great to see of course, but the problem is that consumers aren’t psychic.  And we know that confidence is less associated with spending than is disposable income.  I want to see incomes improve, otherwise the future outlook expressed by consumers is just a fairly uneducated guess.  The latest reading is 21 percent below what the trend says it should be (red line on Doug Short’s chart above.)

Easynomics Rating Methodology: For this index, I will compare the latest reading to the expected level based on a regression line drawn by Doug Short.  If the latest reading is 2 percent below that line or better, I will assign a “positive.”  If it’s between 2 and 8 percent below the line, I will give it a “neutral.”  If it’s worse than 8 percent below that line, I will give a “negative” rating.

 

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