In Secular No-Confidence Do Americans Trust?

The Reuters/University of Michigan preliminary index of consumer sentiment climbed to 56.6 from 56.3 in February. Importantly, the index reached a 28-year low of 55.3 in November. The consumer confidence index is holding its 28-year low, reflecting mounting job losses, a declining economy and asset deflation. Correct! Right now there is no reason for anybody to feel good about anything.

There was also no reason for anyone to feel good in 4Q74 and 1Q80 either, the other periods in America’s history when the index was this low (see long term chart below). The other common denominator between today and the other two confidence recessions is the lack of confidence in leadership.

In 1974, the country was gripped by the Watergate scandal, which created a nightmare that I hope we never see again. In late 1979 and early 1980, the US was being governed by Jimmy Carter, who did not instill confidence anywhere on the planet. On President Carter’s watch, we witnessed the Iranian crisis and the US boycotted the summer Olympics in Moscow. By the end of 1980, Carter was voted out of office and the Reagan revolution began.

Today’s crisis started under President Bush’s presidency, which saw the melt down of the US Financial System and the end of the Great Consumer Credit Cycle. Now the Republicans were voted out of office and it is President Obama’s turn to set the country’s course of action.

With confidence holding at 28-years lows, will the Obama administration’s policies set the tone for recovery or further failure? Or is there another leg down regardless of what Obama does? Only time will tell, but I’m leaning toward an improvement in confidence from here. History’s behavioral patterns find a way of rhyming.

This part bears repeating from my thoughts from yesterday. In this environment the consumer is increasingly rethinking or being more thoughtful with his/her purchases. Consumers are more focused on needs over wants…… Job insecurity and other macro factors have definitely caused consumers to pinch on spending, but importantly, yesterday’s better than expected retail sales number indicates there is still some level of spending.

What are more important are the behavioral changes to the pattern in consumer spending. You can bet consumers will be more thoughtful when spending their hard earned buck. Most are likely to consider each purchase more carefully and be more price conscious even when it comes to non-discretionary spending. It’s likely that discretionary spending will suffer disproportionally, particularly as it relates to purchasing high-end goods, as sticking to a budget will become the “new normal” and large credit card balances will be considered a sin.

Howard Penney
Managing Director