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Continued Stock Gains Won't Boost Consumer Confidence

Posted by: Ben Steverman on August 6, 2010

Consumer confidence, by any measure, has taken another hit this summer, with mainsteam surveys such as the Michigan consumer sentiment index reflecting growing uncertainty about the economy. But in case you’re a cockeyed optimist, or just prone to skepticism, a look at some of the most commonly searched economic phrases on Google and other search engines might cause you to change your mind.

When you type in the word “stocks” on Google, you won’t see the same autocompletes — the feature that automatically finishes a phrase based on the most popular searches — as you would have in January. Instead of “stock under 1” or “stocks under 10,” you now get “stocks to short” and “stocks and bonds.” while on Yahoo! “stocks to own in a recession” is the top autocomplete, according to an Aug. 5 report by Nicholas Colas, chief market strategist at BNY ConvergEx Group. Type in “I want to sell my” and besides predictable suggestions such as house, car and eggs, you’ll now see dog as well, ranked fifth. It wasn’t on the list seven months ago, the report said .

Based on these scans, there’s no evidence that “much has changed in search engine land to indicate better economic times,” Colas concludes. “Those interested in stocks seem to be more prone to risk aversion,” while “unemployment” has replaced “bankruptcy” as the most popular Google autocomplete for the word “filing.”

In RBC Capital Markets’ most recent U.S. Consumer Outlook index, published on Aug. 5, 40 percent of consumers said this is a bad time to invest in stocks, up from 34 percent in July. The share of the 1,008 respondents who viewed this as a good time to invest in the stock market was 16 percent, unchanged from July. The same index showed that 62 percent of respondents plan to spend less this year than last year or nothing at all on back-to-school shopping. Even so, the index rebounded to 63,9 in August from a reading of 47.2 in July, due mostly to less negative sentiment about job security and future economic prospects.

It’s hard to make a case for a strong correlation between consumer confidence and stock market sentiment. The correlation between RBC’s consumer outlook index and the level of the Standard & Poor’s 500 index in any given month is fairly low at 0.27, Tom Porcelli, the U.S. market economist at RBC, said in an interview with Bloomberg Businessweek. (A correlation of 1 indicates that both variables move in the same direction together.) The correlation between the University of Michigan consumer sentiment index and the S&P 500 is even lower at 0.21, he adds.

The Michigan consumer sentiment index dropped dramatically to 67.8 in July from 76.0 in June and is expected to climb to 69.0 in August, acoridng to a preliminary report by Action Economics. The July reading was the lowest since November 2009, while the June figure was the highest since January 2008, Action Economics said. While the
Michigan index is still above the 55.3 low set in November 2008, “all of the confidence measures still remain in recessionary territory despite the rebound in the economy and recent weakness is a notable concern,” Action Economics said.

If anything, Porcelli is worried about the the reverse relationship — the effect a weaker stock market could have on consumer behavior. “When people start to get their 401(k) mailings and see they’ve done very mediocre, I wonder what impact that will have on the retail audience,” he says. Most investors aren’t tracking stock market ups and down on a daily basis, so the harsh reality tends to set in only once a quarter when they receive that envelope from their retirement account provider. The reaction to second-quarter performance probably won’t be positive he says.

That argues for taking monthly data on consumer sentiment toward investments with a grain of salt, given the lag effect between the quarterly 401(k) evidence and consumer surveys, he says.

Weak consumer confidence stems from the minimal reduction in unemployment rather than the stock market, says David Lockwood, consumer insights director at the Mintel International Group in Chicago. He agrees that there’s increasingly less of a connection between consumer confidence measures and stock market sentiment.

“The average consumer’s mindset is that the recession is not over. Such large percentage of families have someone unemployed or someone they know [is out of work]. That’s what’s really being felt by the greater half of society, so not there’s much talk about stocks,” he says. “Stocks can go up, but everybody still thinks we’re in a recession. Those two things are not linked anymore.”

That appears to be borne out by the S&P 500 index’s minimal 0.37 percent move lower on Aug. 6, in the face of a nonfarm payrolls report that showed the U.S. economy lost 131,000 jobs in July, more than double the expected decline. On Aug. 4, the S&P 500 finished 0.6 percent higher despite a smaller than anticipated incease in private employment numbers in July.

The increased incidence of people seeking to sell their dogs uncovered by Colas at ConvergEx jibes with Mintel’s recent research that shows that pet care expenses didn’t come down with the recession, says Lockwood. Economic constraints are forcing people to not only forego most discretionary expenses but “even what they would once consider family members are now expendible.”

The recent recession will have much longer-lasting effects than any of the previous few downturns, in spite of any technical expansion we may see, warns Lockwood. That’s in large part because the problems with the banks haven’t been solved. Until they’re willing to lend to households and small businesses again, any economic recovery will remain slow, he says.

The outsized growth rates in U.S. gross domestic product in the 1990s were driven by robust retail spending. Currently, consumers aren’t able to drive economic GDP growth, he says. “Companies can do really well. You can have 1.5 percent to 2 percent GDP growth without consumer spending, but you can’t have 4 percent on a consistent basis,” he says.

RBC’s Porcelli also expects “low growth for the foreseeable future,” but not a double dip. Productvity has remained high and that helps wages hold up, which will help avoid a return to recession, he says.

—David Bogoslaw

(Corrected to show that the final correlation is between the Michigan consumer sentiment index and the S&P 500 index in the fifth paragraph.)

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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