Consumers Souring on the Economy

Consumer Shock

Two separate consumer confidence measures offered a consistent message over the last several days. Consumers are souring on the economy. Global economic recovery, combined with the pressure applied from Middle Eastern unrest, has a difficult environment further burdened by rising gasoline and other prices.

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Consumers Souring on the Economy

Both the University of Michigan/Reuters measure and the Conference Board's measure published on Tuesday concurred that inflation is the main concern of consumers today. It has them very worried about the affordability of gasoline and food and other goods over the months ahead. As higher necessary gasoline expenditures cut into pocket books, other spending is threatened as well.

The Conference Board's latest take for March showed its Consumer Confidence Index fell to 63.4, a notable decline from February's measurement of 72.0. The mark was the worst in three months in fact. As we have discussed here previously, most of the last year's gains in confidence have been counted in the expectations portion of the survey. The outlook of consumers had improved, surely benefiting from a rising stock market and positive economic data. We continue to be suspicious though of the reported gains in employment, and we've suggested the true unemployment rate is closer to 9.4% then 8.9%. Expectations, however, are easily spoiled, and vulnerable to swift change, as seen in the monthly collapse here.

Last week, Reuters/University of Michigan reported its Consumer Sentiment Index fell to 67.5, from 77.5 in February. That was the lowest reading for the index in more than a year. The expectations index here fell to 57.9, from 71.6 in February; this was the lowest level for consumer expectations since March 2009. The Conference Board's report issued today showed its consumer expectations measure fell to 81.1, from 97.5.

In both cases, the surveyed consumers indicated it was inflation concerns that bothered them most. Inflation expectations moved higher in each report, and the reason is clear, as gasoline has been highly pressured by the events in Libya, Bahrain and the Middle East and North Africa generally. However, even before the turnover of government in Egypt, commodity prices had been steepening. In fact, higher food prices were at the core of the unrest in Tunisia, since the impact is felt more sensitively by these third world nations, where food costs represent a greater proportion of income than in the U.S.

The Conference Board's report has not proven positive upon close inspection, even before today's news. While it has noted better relative results, on an absolute level, the survey displays a clearly miserable state of affairs. For instance, consumers claiming business conditions are "good" increased, but only to 15.1% of those surveyed. Those claiming business conditions were "bad" decreased, true, but only to 37.0%, from 39.3%. And some 44.6% of consumers said jobs are "hard to get", while just 4.4% said jobs were "plentiful".

Study of the numbers shows a pitiful confidence environment, that much is clear. Just 20.6% of consumers expect business conditions to improve over the next six months, and that is down from a still sad 25.2% last month. The numbers are not any better with regard to the jobs outlook or for income expectations. Representing 70% of the American economy, consumer spending is threatened, as is the housing recovery and GDP. Thus, concern is heightening about the possibility of another recession, and the likelihood of QE3 is increasing.

I noted Larry Kudlow Tuesday pointing to manufacturing strength and Jim Cramer spoke recently of the good health of the American multinational. Both statements are true. However, manufacturing alone will not survive the American economy, and the good health of American multinationals will neither support significant US job growth.

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