Tuesday, July 27, 2010

Consumers not buying the recovery

According to the Conference Board's consumer confidence survey released today, the U.S. consumer's outlook for economic opportunity, income growth, and jobs is on the decline. Consumers in the aggregate are not convinced that this recovery will positively impact their lives. They're not buying the recovery, retail investors are not buying stocks, and with consumer credit not expanding and incentives for home buyers and car buyers waning, the prospects for a decline in consumer spending in the coming months is seen by some as almost a certainty.

How does this correlate with rising corporate profits, huge stashes of cash at many companies, higher productivity in many industrial and service firms, and this volatile but recovering stock market. In fact, the two seemingly opposite trends may be consistent with expected patterns, as follows:
---Equity markets look ahead, not at today. Retail investors are often either wary of "bets" on the future or unable to take the risk of looking forward. Institutional investors have both the mandate and depth of resources to do so.
---After the financial crisis, or are we still in it, large corporations are at this point exceedingly cautious about new hiring and investing, and about making new commitments to expansion and research. The M&A market is just beginning to percolate. That in the aggregate large corporates have the ability to invest and grow without significant reliance on the credit markets is a significant positive, but for now the use of those resources will be like my elementary backstroke and lame breaststroke as I swim laps, and nowhere near a dive into the pool head first and clearing the first lap underwater, yet.
---Many large cap and midcap stocks have global business exposure that gives them opportunities that the U.S. consumer either can't see or sees as a threat.
---What is hard to see and maybe irrelevant on the much discussed "Main Street" today is that the U.S. is certainly one of the world's least dysfunctional economies despite the many issues that are faced. This augurs well for eventual growth, as the world turns(a nod to CNBC coverage).

The big discreet issues for consumers are JOBS and CREDIT. If the points above are credible JOBS have a reasonable chance of stabilizing and then slowly recovering but at this point getting to 8% unemployment by 2013 might be seen as a victory in the financial markets but as an ongoing problem for the chronically unemployed, the displaced industrial worker, the young, or the underemployed. Consumer and small business CREDIT has been drastically curtailed and that will continue for the foreseable future due to regulatory changes and the almost complete disappearance of the securitization markets. Originators are conservative about any extensions of credit, rating agencies are afraid to rate, investment banks are loathe to package any but the safest consumer credit securities, and investors will only take credits of pristine quality. The financial reform bill is still being parsed for understanding, the new consumer credit oversight agency is just being organized, and trial lawyers are sharpening their knives to go after any financial institution that hits a regulatory chalk line that still hasn't been drawn.

That consumer confidence is weakening should not really be a surprise. TODAY is not so good. What that really means for FUTURE economic health is unclear, but it is not necessarily bad.


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