Saturday, January 17, 2015

Consumer Confidence Soars, But There is a "But".

The University of Michigan's Consumer Sentiment Index soared to an 11-year high on Friday, tipping the scales at a whopping 98.2%.  (Bloomberg: Consumer Sentiment in US Surgest to 11-Year High.)  The economists surveyed were expecting a value of 94.1%.  That they were so far off the mark, coupled with statements cited in the article, demonstrates a bit of a disconnect between the economists and a variety of the numbers.

It is not surprising that consumer sentiment soared.  When it comes to spending, what influences the perception of the consumer the most is what is staring them in the face at virtually every major intersection: the price of gas.  Next to gas prices, consumers are highly attuned to what they spend in the super market.  As we've seen, the price of gas is in free-fall, and prices in the stores are relatively flat.  Thus, consumers are happy for now.  They are, however, also very skeptical, but more on that in a moment.

The other aspect that impacts the consumer's economic viewpoint is job security.  Here is where I don't believe the picture is as rosy as economists would have us believe.  We're into January now, which means much of the cyclical job loss has peaked.  Consumers, for the most part, are comfortable thinking that, if they made it through December with their job intact, then there's a good chance they'll continue to be employed at least to the summer. 

The number that is always staring them in the face is the unemployment number, currently at 5.6% nationally.  Of all of the meaningless statistics that the government releases, however, this has to rank near the top for "worst of breed."  The true measure of the employment situation is the Participation Index, not Unemployment, and as of December - the January number isn't out, yet - that figure sat at an abysmal 62.7%.  It's the lowest value since 1978 - a period of post-Watergate economic stagnation and the start of economic distress that would last another 5 years.

One major difference between now and 1978, however, is that the Participation Rate was improving steadily then.  The slope of that graph was positive, whereas today it's negative.  Today, the Participation Rate is growing steadily worse.

Participation Rate - 1970 to Present

There is a bit of a stabilization towards the end of 2014, as you can see in the graph, but the job picture is not good at all.  There are certain industries, in fact, where it's dismal.  Ask yourself if it's possible for someone to do your job out of a remote location (i.e. India) and if the answer is "yes" then you are at an extreme risk of job loss.  It's as simple as that.

Look at the extreme disconnect between this graph, and the statement made by senior US economist Brian Jones: “We continue to generate jobs at a fairly rapid clip, and what you’re also seeing is consumers’ response to what I call a tax cut from lower gasoline prices. That frees up a lot of spending and that means they can purchase other goods and services.” 

One glance at the Participation Index will tell you that, if jobs are being created, they certainly aren't going to Americans in search of work.  That number is in free-fall, and as long as we continue to outsource our jobs to the third world, and as long as we continue to import h1b workers from the third world, the job situation in the US will continue to worsen.

As to the lower price of gas freeing up a lot of spending on goods and services, well, where is it?  The retail sales number for December was a disappointment.  This leads to my comment earlier regarding the skepticism of the consumer.  Yes, gas prices are down, and yes, consumers have noticed it.  But here's the big "But."  Consumers do not believe it's here to stay.  Very few consumers understand what drives the price of oil, and fewer still understand how that - and other factors - impact the price of gas at the pump.  Instead, conspiracy theories abound.  Many believe it's manipulated by the government, many believe that it's set by "big oil", and most believe that the price will skyrocket back up to $4 per gallon almost overnight.  What consumers are not doing is looking at the extra $10 or $20 in their pockets at the end of the month as a reason to go out and buy something else.

Richard Curtin, the Michigan Survey director, made an interesting statement which calls into question the validity of the survey itself: “Gains in employment and incomes as well as declines in gas prices were cited by record numbers of consumers.  More consumers spontaneously cited increases in their household incomes in early January than any time in the past decade.”

That statement troubles me for two reasons.  First, we've seen that employment in general is not increasing.  We know that the number of people working part time, instead of full time, has increased, and we can see from the graph that the number of people that have a job (out of the pool of people that want a job) is at a 36-year low.  Think about that!  The employment conditions have not been worse in almost 4 decades, and they continue to decline!

Second, we know that income is not increasing.  It's barely keeping pace with inflation.  Hourly earnings only increased by 1.7%.  Inflation is sitting today at 1.6%.  Factor in the increased cost of benefits in 2015, and families are losing money, not gaining it.  About the only way to increase your income today is to go out and get a second or third part-time job - certainly not something that any consumer would view as a positive.

So yes, the consumer confidence number did increase significantly.  Don't read too much into it.  That increase is temporary exuberance driven entirely by the temporary sharp decrease in gas prices.  Until I see tangible proof that consumers are doing anything with that extra money beyond paying down credit card and loan debt, I'll continue to treat the index as an interesting but relatively insignificant portion of the global picture.

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