Despite some decidedly upbeat earnings reports this morning, investors put the brakes on a three-day stock market rally after the Conference Board’s Consumer Confidence Index confirmed what most Americans with their eyes wide open probably knew already. There are a whole lot of good reasons to be worried about the state of the U.S. economy and our financial futures.
In July, the Conference Board’s Consumer Confidence Index dropped to 50.4 (on a 100 point scale) from June’s revised reading of 54.3. While that’s no where near the all-time low of 25.3 in February 2009 during the depths of the recession, the reading signals a troublesome reversal—the second straight monthly decline after three months of increases. It was also below economists’ expectations.
Americans grew more downbeat about their current economic situation, but even more pessimistic about the future. One component of the index, which measures how people feel about the economy now, dropped from 26.8 to 26.1. Another component, which measures how people view the economy over the next six months, dropped evenly more sharply from 72.7 to 66.6.
“This is an extremely low reading,” Lynn Franco, director of consumer research at the Conference Board, told The Fiscal Times. “Obviously, there is very little confidence out there. While the recession may be over, it is still feeling like a recession to consumers.”
That’s significant because consumer spending accounts for 70 percent of U.S. economic growth. And the way consumers feel impacts how much they spend, which in turn influences how much business invests, which together with exports and government spending determine how much the U.S. economy grows—or doesn’t. “Consumers have been excellent predictors of recessions,” says Franco.
Behind Consumers’ High Anxiety: The Jobs Deficit
Why are Americans increasingly downbeat? Franco says concerns over business conditions and the job market are “casting a dark cloud” over them. Those saying business conditions are “bad” increased to 43.6 percent in July from 41.0 percent in June, while those expecting an improvement in the next six months decreased to 15.9 percent from 17.1 percent.
As for jobs, those claiming they are “hard to get” rose to 45.8 percent from 43.5 percent, while those expecting improvement in the months ahead dropped to 14.3 percent from 16.2 percent. Concludes Franco: “The labor market is key to consumer confidence. Until we see a turnaround in the labor market we are not going to see a turnaround in confidence.”
The Chicken and the Egg
That brings us to the chicken-and-egg dilemma. Why would businesses begin hiring if anxious consumers are pulling in their belts? After all, corporations have been successfully boosting earnings by cutting costs; investing and hiring could actually trim profits in the short term. Unless something happens to reverse this vicious cycle—say, another round of fiscal or monetary stimulus—the U.S. economy may slow down further or, worse yet, dip into another recession.
Emerging Market Shoppers to the Rescue?
Ironically, the one place where consumers are still buoyant and buying is in the developing world, countries like China, India, Indonesia and Brazil, where governments are running budget surpluses, and growing middle classes are learning to shop ‘til they drop. That helps explain why their stock markets have been rising, while ours are down for the year. Ironically, emerging-market consumers may ultimately be the ones who help pull the developed world out of its economic funk.