The Consumer – Easy Pod: Hints of Improvement But Consumer Still Under Pressure (Jan 31, 2012)

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.

Quick Summary

Indicator (Click for details – only works if full article is open)	Current Rating (change)
Daily Consumer Leading Indicators	Neutral
Bloomberg US Weekly Consumer Comfort Index	Negative
Consumer Confidence Index (The Conference Board)	Negative
Consumer Sentiment (University of Michigan)	Negative

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Indicator: Daily Consumer Leading Indicators (Consumer Metrics Institute)  |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: Jan 28, 2012

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 January 28, was about 4% 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 96 for January 28, which means preparations for consumer discretionary purchases is 4% lower than the fairly normal levels seen back in 2005.

Implications: While the new year initially brought a slow, steady downward sloping trend, we’ve seen a stop-and-go rise since the middle of January.  It does look like the average daily value for January will end up being a few points higher than December’s value.  It still won’t be a great place, but it’s good to see demand continuing to stay in that neutral range.

The problem is that consumers have been spending money they don’t have.  The evidence for this is a drop in the savings rate – it was 5.8 percent in June 2010 but down to 3.5 percent last month.  Fortunately, the December 2011 reading came in higher at 4.0 percent, mostly because we saw a little bump in income.  In fact, the amount of disposable personal income (amount of money left over after spending on mandatory things like housing, food, etc.) was the highest in December 2011 since June 2011.

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: Jan 22, 2012

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 almost 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 (-) 46.4

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: January 2012

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: 61.1 (versus 64.7 the month prior) – see chart from Dshort.com

Implications: The January reading dropped back down again after improvements in both November and December of 2011.  The change from the previous month was due mostly to a drop in the “present situation” value.  So, consumers feel like they are doing worse this month, but their outlook is unshaken.  That still leaves overall consumer confidence at an extraordinarily low level.

Bottom Line: The latest reading is 25 percent below where the trend suggests it should be (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: January 2012 (final 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 starting to feel less bad about their present conditions and outlook for the future.  But they are still considerably below where they should be, historically speaking.

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: 75.0 (versus 69.9 for the prior month) – see chart from Dshort.com

Implications: The increase in the overall index was due in equal parts to the present conditions and the future outlook.  In fact, the latest survey indicates that consumers’ feelings about their present conditions (84.2 survey value) is starting to approach the average of all months in this survey’s history, which is around the 97 level.  Similarly, the outlook portion of the survey is creeping up toward the historical average (currently 69.1 versus average of about 78).

Bottom Line: The latest reading is 12 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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