Curiously Weak Consumer Confidence

[ProSense]

Tim Duy

Curiously Weak Consumer Confidence

There was a bit of angst regarding yesterday's Conference Board consumer confidence report. See, for example, Mark Thoma and Brad DeLong. The report appears to contradict the generally positive Univ. of Michigan report - still weak compared to pre-recession, but at least moving in the right direction. More interestingly, it is at odds with recent consumer spending reports, not just early reports of the best Christmas season (in terms of year-over-year gains) since 2005, but also the most recent trends in personal consumption expenditures.

Something is off-kilter, and has been since mid-year. Consumer confidence appears too low relative to actual consumption. Either confidence should be moving higher, as the Univ. of Michigan survey suggests, or consumption needs to slow dramatically. Place your bets.

Consider the recent trends in real consumer spending (percentage change are log difference approximations):

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Ignorance aside, I think the acceleration needs an explanation of some sorts. Throwing out some ideas, first note that household balance sheets are in a better position, at least measured by the debt servicing costs:

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Consumption can be supported by taking savings rates back down to zero, or close to it. To be sure, you can respond angrily that consumers desperately need to rebuild their asset base, that policies such as ZIRP that encourage spending simply kick the can down the road, etc. And these things might be true. But, in the near term, one cannot deny the potential for consumer spending support via a falling saving rate. This is especially important given occasional concerns about rising oil prices. When the last oil shock hit in 2006-7, saving rates were hovering around 2%, not much cushion to absorb the shock. At least at 5.3% consumers have a little more wiggle room.

Finally, real income less transfer payments are on the rise:

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Great charts.