Many investors took comfort last week when initial US gross domestic product (GDP) for the first quarter of 2008 was reported at 0.6% compared to consensus of 0.3% and initial unemployment for April came in at 5.0% versus consensus of 5.2%. We believe these initial reports are suspect and subject to negative revisions in the future. Furthermore, since the consumer represents more than 70% of US GDP as the US consumer goes so goes the US economy.
As we wrote last fall in "This Ain't My American Dream" about the subprime mess and credit excesses, "Many of these young Americans will wake up some morning to find that their irresponsibly financed excesses of recent years have left them with no equity in their homes, no liquidity and limited access to credit. How these young Americans and other citizens in similar situations respond will likely be a key determinant of the future direction of the United States economy and government leadership."
One of the best sources of information on current consumer sentiment is the University of Michigan/Reuter's Consumer Confidence Survey. The headline of their April press release says it all, but here are some additional stats that paint a more complete picture of the American consumer's psyche.
- Headline "Confidence Sinks to Quarter Century Low"
- The Index of Consumer Sentiment was 62.6 in the April 2008 survey, down from 69.5 in March, and significantly below the 87.1 recorded last April and the recent peak of 96.9 recorded in January of 2007.
- The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 53.3 in the April 2008 survey, down from 60.1 in March, and well below the 75.9 recorded in April 2007 and the recent peak of 87.6 in January 2007.
- From the January 2007 peak, the Expectations Index has fallen 39%; the Expectations Index fell by 24% prior to the 1990 recession and by 30% prior to the 2001 recession.
- Just three-in-ten consumers plan to spend the tax rebate in 2008, with most consumers preferring to repay debt and add to savings.
- Smaller gains in inflation-adjusted incomes were expected in April than at any time in the past quarter century.
- Consumers expect the unemployment rate to steadily increase during the year ahead, rising to 6.0% by the start of 2009.
- Nearly nine-in-ten consumers thought the economy was already in recession, and three-in-four anticipated that bad financial times would persist for at least another year. This was the worst assessment of overall economic health since the early 1980's.
- Uncertainty about future income and job prospects has had a devastating impact on buying plans, with consumers citing these uncertainties three times as frequently as they did a year ago.
Although the Fed arguably prevented a systemic shock to the financial system with its rescue of Bear Stearns, as it relates to the broader economy the Fed can simply hope to promote a monetary environment conducive to stable prices, employment and growth and hope that the public and economy respond appropriately. Naturally, we can expect to hear government propaganda statements about the health and resiliency of the US economy with increasing frequency (think reverse psychology, political agendas and legacies), but by no means do Ben Bernanke, Hank Paulson and the Federal Reserve control the direction of US economy. Rather, the answer to the question of who controls the future direction of the US and global economy is "It's the consumer stupid!" (according to an oft used campaign quote from President Clinton).
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