December consumer confidence falls, will common sense follow?

It is just four days before Christmas, a religious holiday and also consumer celebration of spending. Today the Reuters/University of Michigan Consumer Sentiment Index for December came in at 75.5. November's reading was 76.1.

What does it mean? What can it mean?

Consumers -- people who buy things in order to live -- are less confident about their finances and for good reason. The global financial house of cards has turned consumers' houses into poker chips. The consumer confidence index is often explained as indicating the prospects for consumer spending -- two thirds of economic activity -- without questioning the premise that unbridled consumer spending is good. Consumer spending has been enabled by an artificial inflation of residential real estate prices. Consumer spending has been a speculative excess of sorts.

Now, reality is sinking in and consumers, who earn money presumably through productive activity, are seeing a bleak near-term future.

Time for a little less debt-fueled spending. Time for a little reality-based home economics. A house is a home if you can make the mortgage payments. And you can make the mortgage payments if you resist buying cheap junk you don't actually need. Go for it. Make a new year's resolution to spend less than you earn.

It's okay. You, the consumer, are not responsible for sustaining the economy while slitting your own pockets.

Consumer sentiment -- how low will it go?

Falling farther than expected, the Reuters/University of Michigan preliminary December number came in at 74.5 from 76.1 in November.

Here's the familiar list of causes :
subprime mess
credit crunch
fuel prices
gloom and doom
volatile markets
foreclosure crisis

November consumer confidence, lowest since after Hurricane Katrina

As we enter the most important season for retailers, the Reuters/University of Michigan consumer sentiment index for November came in at 76.1.

Retailers are bracing for cautious consumers with limited credit spending conservatively.

October Consumer Confidence -- lower than expected

The Reuters/University of Michigan Index of Consumer Sentiment fell further than expected in October, as the persistent housing decline slammed expectations for the economy.

The index fell to 80.9 in October from a reading of 83.4 in September.

Trouble in the housing market is seeping into other sectors as consumers become more guarded with their resources.

Consumer Confidence -- Preliminary October Figure

The University of Michigan and Reuters reported their consumer sentiment index fell to a reading of 82.0 in October, down from 83.4 in September.
(source)

Consumer sentiment holds steady in September, UM reports

The final September University of Michigan consumer sentiment index has held steady at 83.4.

Preparing for September Consumer Confidence Number

It's been a heck of a month. Let's review:

1. August orders for durable goods take their biggest decline in seven months. (source) 9/26/7

2. Existing home sales drop for the sixth straight month in August reaching the lowest rate of sales in five years. (source) 9/25/7

3. The Conference Board consumer confidence index dips to a 2-year low. (source) 9/25/7

4. Crude oil tops $84 per barrel. (source) 9/20/7

5. U.S. dollar and Canadian dollar hit parity for first time in 30 years. (source) 9/20/7

6. Fed cuts interest rates for the first time in four years. (source) 9/18/7

7. RealtyTrac reports foreclosures jumped 36% in August. (source) 9/18/7

8. Crude oil hits record $80 per barrel. (source) 9/13/7

9. U.S. payrolls decrease by 4000 instead of increasing by the expected 110,000. (source) 9/7/7

10. GM announces fourth quarter production will be cut by 10% in response to weak August sales in a tightening credit market. (source) 9/4/7

Consumer Confidence--Preliminary September Number

Despite a softening housing market, increases in foreclosures, the first decline in U.S. payrolls in four years, job slashing in the mortgage industry, and the dollar hitting a record low against the euro--consumer sentiment seems to be holding steady at 83.8 mid-month, compared to 83.4 in August, according to the University of Michigan/Reuters survey of consumer sentiment.

Truth is Stranger than Fiction--Economic News this Week

Looks like maybe we're not in a one-state recession anymore.
U.S. payrolls decreased by 4000 instead of increasing by the expected 110,000. It's the first drop in four years.(source)

More job cuts in the knowledge-based financial sector.
Countrywide Financial, the biggest U.S. home lender will downsize 12,000 jobs (1/5 of its workforce) over the next three months. (source)

Denial runs as deep as your credit limit.
August back to school spending was brisk. (source)

Your credit limit may be increasing if you are a particularly bad risk, through the generosity of credit card companies.
Direct mail credit card offers to subprime customers were up 41 percent in the first half of this year, compared with the first half of 2006, according to Mintel International Group.(source)

Do these things taken together make any sense?

Next Friday will bring the University of Michigan Consumer Sentiment Preliminary Number for September. It's anybody's guess.

Consumer Confidence Index--August

The Reuters/University of Michigan August Consumer Sentiment Index came in at 83.4, markedly lower than July's unexpected high of 90.4.

Good economic news this summer has been eclipsed by the worldwide impacts of subprime mortgage defaults in the U.S. Central banks from here to Britain are still busily loaning money to institutions that uniformly claim sufficient liquidity. Barclay's has claimed that a "'technical breakdown' in the UK's clearing system forced it to borrow £1.6bn from the Bank of England."(source)

This morning the New York Times reports that "Freddie Mac, the nation’s No. 2 buyer and backer of home mortgages, set aside more than $300 million in the second quarter to account for bad loans, contributing to a 45 percent drop in profit."

Consumers have enthusiastically used home equity to continue spending. Consumer spending accounts for two thirds of economic activity. Numerous "homeowners" are now flipped, owing more than their homes' current market values.

The big question: what will happen when consumers decide or are forced to spend within the limits of their actual incomes?

Consumer Confidence Index--August Mid-month Figure

It's official, the preliminary August figure from the Reuters/University of Michigan Surveys of Consumer Sentiment is significantly lower than July's final number of 90.4. August's mid-month assessment came in at 83.3. (source)

The sharp drop comes as no surprise after weeks of turbulence in financial markets around the world. Yesterday brought difficult news about the housing sector.

From BusinessWeek, (Housing Starts: It's Going to Get Worse--Starts on new homes plummeted to a 10-year low in July, exceeding Wall Street's prediction by 25%), August 16:

"On Aug. 15, the National Association of Home Builders (NAHB) reported that the NAHB/Wells Fargo Housing Market Index had declined two points in August to 22, its lowest level since January, 1991—which also happens to be the worst month for housing starts in history. Derived from a monthly survey, the index gauges builder perceptions of current single-family home sales and sales expectations for the next six months."

In a consumer driven and consumer spending centered economy, this is bad news. The conventional wisdom holds that new housing stimulates retail spending by consumers who need stuff to put in their houses. And bigger houses mean even more stuff.
But when is enough, enough?

Consumer spending has accounted for more than two thirds of economic activity. A significant portion of this has been debt driven. How ironic that prudent financial behavior on the part of consumers (spending within their means) is seen as harmful to our economy.

"We have nothing to fear but fear itself." Who said that? A neighbor to the north! In an article today at Canada.com, Avery Shenfeld, senior economist at CIBC World Markets (although he didn't attribute the quote to a person or context). His point was to reassure Canadians that they were relatively sheltered from economic turmoil south of the border. He was quoting F.D.R.

What F.D.R. did say in his first inaugural address March 4, 1933 was:

"So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance."

That was then; this is now.

August Consumer Confidence Index--Preparing for the Preliminary Number Friday

In just two days, the mid-month preliminary Reuters/University of Michigan Consumer Sentiment Index will be released for August. July saw an unexpected rise in consumer confidence, but August will surely be lower. In the last few weeks, financial markets have grown highly volatile due to the subprime mortgage lending crisis in the United States.

Why does this matter to consumer confidence? Because consumers have been tapping their inflated home equity as though it is a personal ATM. Trouble is, it isn't real equity until you have paid off your mortgage. Some in the financial world might disagree with that statement. In truth, consumers were lulled into thinking residential real estate values would continue to rise with no end in sight.

And so tapping that "purchasing power" seemed to make sense. Some people did it to pay for luxuries, others for necessities. Indeed, after 9-11 consumers were urged to shop as a patriotic act. Imagine that, reckless spending as patriotic duty. Kind of resembles the attitude toward the actual cost of the war in Iraq.

Now, many "homeowners" are actually in negative territory--owing more than their properties are worth and locked into loan agreements with interest rates that will reset higher than they can afford. And this in a historically low interest rate environment.

But these really bad loans were made because the mortgage industry has shifted from the bailiwick of depository institutions (banks, credit unions and savings and loans) to the mercurial world of non-depository lenders. Since the 1980s most regulation of mortgages has been gutted. In plain speak, mortgages became securitized--fodder for big deals on Wall Street. Local non-depository lenders and brokers had no incentive to make prudent loans; bigger was better. More was better. In this go-go environment local accountability took a back seat to closing the deal at any cost.

As the subprime mortgage debacle continues rattling global markets, credit will tighten, property values will continue to decline, foreclosures will increase and the impact will reach the sectors that sell to home owners--places like La-Z-Boy and Home Depot.

Consumer confidence? If it remains high, the folks surveyed are either in excellent financial shape or deep denial.

Consumer Confidence Index--July Highest in Five Months

It's official. The Reuters/University of Michigan final figure for July consumer confidence is 90.4 up from 85.3 in June.

What does this tell us about our financial future? Nothing really.

The survey was completed before this week's market turbulence sparked by Countrywide Financial's truth telling. The mortgage giant's 2d quarter net income declined 33%. Prime rated borrowers are slipping on making their payments. And this on the heels of the hedge fund wake up call last week. The deeper worry is the likely tightening of credit for everyone. Yes, everyone.

The question now is: will those happy upbeat consumers, accustomed to treating home equity like lottery winnings, continue to spend with reckless abandon? Or will they get a grip and understand the limits of their means?

Let's wait and see.

Consumer Confidence in the Global Village

The University of Michigan Institute for Social Research has been conducting consumer surveys since 1946. Earlier this year, UM entered a partnership with Reuters to disseminate the results of their consumer surveys. The gold standard of such surveys, the Index of Consumer Expectations portion is an official component of the U.S. Index of Leading Economic Indicators.

The final numbers for July are due out tomorrow morning. Drum roll please. The preliminary numbers for July were unexpectedly high--92.4 up from 85.3 in June. But domestic economic news has been mixed in the meantime.

On Tuesday Countrywide Financial Corp., the nation's largest mortgage lender, reported a 33% drop in second quarter net income. It also reported that prime borrowers are showing payment difficulties on home equity credit lines.

At 3:30 today, the Dow was down by 350 points, with analysts citing concerns about credit as catalyst for the meltdown. And this had a global impact, as the SanDiego Tribune online site reports:"The declines triggered a global sell-off in stocks, causing minor losses in Europe to accelerate rapidly along with the Dow's drop. In Europe, Britain's FTSE 100 closed down 3.15 percent, Germany's DAX index dropped 2.39 percent, and France's CAC-40 fell 2.78 percent."

To prepare for Friday's release, have a look consumer and business confidence assessments from the global village:

South Africa--Consumer Confidence Still Positive-MasterIndex survey commissioned by Mastercard.
India--India Tops Consumer Confidence Index--AC Nielsen survey for the first half of 2007.
Turkey--Consumer Confidence Drops by .82%--survey by Turkstat and the Central Bank of Turkey.
China--Consumer Confidence Rebounds in July--survey by Xinhua Finance and eziData.
Germany--Business Confidence Falls Slightly in July--survey by Ifo, Munich.
France--Business Confidence Near Six Year High--from Insee, Paris-based national statistics office.

The official release of the Reuters/UM Consumer Confidence Index is around 10a.m. Brace yourself.

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.