Saturday, July 14, 2007

Consumer Sentiment Index--Wishful Thinking About Other People's Money

Friday the Reuters/University of Michigan Consumer Sentiment Index came in at 92.4, an increase from 85.3 in June. This unexpected leap is believed to predict increased consumer spending ahead. Good news if you have stuff to sell. Sometimes reports summarize with the shorthand "consumers are upbeat." Like little Eloise, shoppers are ready to spend, spend, spend, and charge it please! Thank you very much. It's the perfect marriage of PMA and OPM (positive mental attitude and other people's money).

The index measures consumers' expectations about spending and saving, but the Bloomberg article covering yesterday's preliminary number explains things mostly in terms of spending.

"Rising confidence backs forecasts that spending, which accounts for more than two-thirds of the economy, may pick up from a second-quarter trough."

Translation: People feel o.k., so they expect to spend more. Is it possible that their confidence is misplaced? Or is it simply enough that they feel confident? And is this confidence fact-based, belief-based or just wishful thinking?

"Economists forecast spending will accelerate to a 2.5 percent pace this quarter from an estimated 2 percent rate in the second quarter, according to the median forecast in a Bloomberg survey of economists this month. Spending rose at a 4.2 percent pace in the first three months of the year."

But how are people accomplishing this spending? Largely through consumer debt and tapping home equity, which by the way is shrinking nationally. Nationally, not just in Michigan.

And here's a fun tidbit toward the end of the article:
" The National Association of Realtors said June 6 that it expects the U.S. median home price to drop 1.3 percent in 2007. The last time the national median price fell was during the Great Depression in the 1930s, according to Lawrence Yun, an economist for the real estate group in Washington."

Take a moment with that last bit. The Great Depression. What characterized the lead up to the big one? Speculative "investing" run amok. A vast gap between the richest and poorest. Downward pressure on prices. Widespread use of credit. Hmm.

From Bloomberg:
"Added to the higher gas prices, a drop in the amount of equity homeowners can extract from their houses is hurting consumers' spending power."

Now this last sentence is quite revealing because it assumes consumers' spending power comes from tapping their assets, which are now and always have been vulnerable to a fluctuating real estate market. Consumers' spending power results from depleting their assets--from sucking the yolk out of their nest egg. But even as they spend against their future, they are confident and the numbers prove it.