Wednesday, February 25, 2009

Don't Expect Consumer Spending to Rebound Soon

From Reuters:

The Conference Board, an industry group, said its consumer confidence index fell to 25.0 in February, the lowest since the index began in 1967, from 34.7 in January.

Consumers' gloomy outlook showed no sign of turning around, according to the report, boding ill for the consumer spending that drives some two-thirds of the U.S. economy.

The data "suggests, unfortunately, that we still haven't found the bottom for the economy," said Zach Pandl, economist at Nomura Securities International in New York.

There are a lot of reasons for this drop.

1.) The job market is terrible. In January 2007 there were 138,080,000 total non-farm jobs in the US compared with 134,580,000 in January 2008 for a total loss of 3.5 million jobs in a 12 month period. 1.77 million have occurred since the October numbers. In other words, job losses are accelerating.

2.) There are two sources of wealth for Americans: stocks and real estate. Stocks are in a bear market. Home prices continue to drop:

The day's U.S. housing data also offered little reason for optimism. Prices of U.S. single-family homes fell 18.5 percent in December from a year earlier, with the pace of decline speeding up, according to the S&P/Case Shiller home price index.

That was the biggest drop since the data series began 21 years ago and suggested prices will probably continue falling in the months ahead, extending a 13-month-old recession.

The S&P/Case Shiller composite index of home prices in 20 metropolitan areas fell 2.5 percent after dipping 2.3 percent in November.

"There are very few, if any, pockets of turnaround that one can see in the data," said David Blitzer, chairman of S&P's index committee. "Most of the nation appears to remain on a downward path."

A separate report from the Federal Housing Finance Agency said single-family home prices fell a record 4.5 percent in the last three months of 2008 compared with a year earlier, though the pace of decline slowed.

Housing will not be anywhere near a bottom until we see the rate of year over year price declines slow. As a result, we can expect to see a continued drop in housing prices over the new 6 months (and probably longer).

As a result of the drop in housing real estate prices, household net worth has dropped 11% since the third quarter of 2007. In short, between real estate and the stock market, people are feeling poorer. That's leading to lower consumer spending:

Overall personal consumption expenditures are dropping at fast rates on a year over year basis.

A big reason for this a a drop in durable goods purchases (cars and houses).

But non-durable rates are dropping as well.

To reverse this swoon in spending we need a stronger jobs market and a stable stock and real estate market. Neither is going to happen anytime soon.

However, even when that happens, there are serious questions about whether or not consumer spending will return to pre-meltdown levels. I'll touch on that in the next post.