Issue 45 • September 30, 2009

Consumer Confidence Hits Speed Bump, Consumption the Bigger Question Mark

‘Bloomberg (Sept. 29): U.S. Consumer Confidence Unexpectedly Fell This Month ...’

Consumers are feeling slightly less confident these days, surprising economists who were looking for expectations to rise again this month. Yesterday’s report showed the Conference Board’s index falling to 53.1, down from 54.5 in August.¹

It’s worth noting that this index had risen in recent months to a level about even with the lowest point of previous recessions, after plunging to an unprecedented record low of just 25.3 earlier this year ... so far down that any upward trend now feels positive!²

Although confidence survey data can be “noisy,” and often subject to large revisions, the bigger picture here is that consumers are still trying to cope with the aftermath of an unprecedented shock to their wealth.

The tentative outlook on the part of consumers is a primary reason we have maintained a cautious view at Weiss Capital Management. While we’ve been shorter-term optimistic on markets and the economy, we can’t ignore lingering concerns that U.S. consumers won’t have the means or desire to sustain a strong economy going forward.

Consumers account for roughly 70% of overall GDP through personal spending on goods and services. But consumers are also deeply in debt and have suffered large losses in the value of their homes and investment portfolios. Consumers today are saving more, spending less, and paying down debt.

In other words, a conspicuous LACK of consumption now threatens sustainable economic recovery.

While saving more and paying down debt may be the fiscally responsible thing for consumers to do ... ultimately leading to a stronger economy down the road ... in the meanwhile, it is a very deflationary process … a process that will take time to unwind ... time that will be measured in years, not months.

Today’s situation represents almost a complete reversal of the 1980s and 90s culture — one of conspicuous consumption. During those years, the savings rate fell from 10% to less than 1%. After spending pretty much ALL of their incomes, Americans then took on staggering debt loads to finance still more consumption — debt as a percent of disposable income DOUBLED from 65% in the 1960s to 130% by 2008.³

Debt-fueled growth wasn’t unique to consumers. Total U.S. government debt ... federal, state, and local combined ... also expanded at a rapid clip. Today, total credit market debt in the U.S stands at a record 373% of GDP. This is simply unsustainable.⁴

Of course, it’s difficult to know exactly where the tipping point will be ... how much debt is TOO much ...

Growing debt means an expansion of debt service expenses. In other words, more out of each dollar of income will go to pay the bills for yesterday’s consumption, with less left over for consumption today and tomorrow.

Meanwhile, the income side of the equation has hardly expanded at all. In fact, median household income in the U.S. fell 3.6% last year alone — the steepest decline in 40 years.⁵

In other words, our collective incomes have NOT kept pace with our growing debts ... not by a long shot.

Now, as a result of the massive shock of $14 trillion in lost net worth during the recent financial crisis, consumers are understandably paying down debt. $200 billion in credit repayments have already occurred since the fourth quarter of 2008.⁶ And this massive de-leveraging may just be the start.

Take a look at the graph at right, which illustrates the percentage of household debt to GDP. You’ll see that in the early 1980s, the ratio was below 50%. To get back to this level, Americans would need to cut their household debt ratio in HALF ... or pay back about $7 trillion of total debt.⁷

Potentially, this means $7 trillion LESS in consumption as Americans use these funds to repair their damaged balance sheets instead. Of course, this deleveraging cycle could stop at a higher level than 50%, but it is a process we believe will go on for a considerable period of time, to bring our economy into better balance.

In the meanwhile, this massive debt burden, coupled with less consumer spending, probably means a slower growth trend for our economy overall. We may very well see some positive surprises in quarterly GDP data in the near future ... but the real question is, can such a rebound be sustained longer term?

Good investing!

Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.

¹ Bloomberg: U.S. Consumer Confidence Unexpectedly Fell This Month, 9/29/09
² Ibid
³ Gluskin Sheff Economic Commentary, 9/15/09
⁴ Cumberland Advisors: The Drunk and the Liquor Store, 9/21/09
⁵ Gluskin Sheff Economic Commentary, 9/14/09 & 9/21/09
⁶ Gluskin Sheff Economic Commentary, 9/18/09
⁷ Ibid.