Markets & Finance

The Economy: Consumers' Gloom Thickens


The Conference Board figures show a big November drop in buyer confidence, though spending decisions have yet to be affected

When it comes to U.S. consumers, it's important to remember that what they tell survey-takers, and what they actually do, are often two very different things. The Nov. 27 release of the Conference Board's closely watched consumer confidence survey posted an even bigger November drop than economists had expected, indicating rising gasoline prices, housing market woes, and credit-market worries may be taking their toll. And yet the report comes on the heels of data showing robust retail sales for the Black Friday holiday shopping weekend, and probably for the month as a whole.

But while consumers' gloomier mood may not be showing up in spending figures, it is quite evident in key housing sector reports. The S&P/Case-Shiller home price data for September and the third quarter overall, released Nov. 27, showed a more troublesome acceleration in the pace of price declines in the housing market.

Here is Action Economics' rundown of the consumer confidence and S&P/Case-Shiller reports:

Consumer Confidence

November Consumer Confidence dropped to 87.3 (median 92.0) from a revised 95.2 (previously 95.6). This is the lowest reading in the headline figure since October, 2005, when confidence was jolted by Hurricanes Katrina and Rita. The data imply that record gasoline prices, falling equity prices, financial market turmoil, and general negative news headlines are all continuing to weigh on sentiment. The headline confidence decline exceeded the November drop in the Michigan sentiment index to 76.1 from 80.9.

The confidence drop in the November report was led by a particularly hefty decline in the expectations index to 68.7 from 80.0. The current conditions series moderated only to 115.4 from 118.0. This mix is what might be expected if the drop were led by negative news rather than shifting personal economic circumstances.

It now appears the confidence declines from the current bout of soaring gasoline prices and falling stock prices, and the associated barrage of negative news from the credit markets, is comparable to that seen with Hurricane Katrina and the March, 2003, start of the war in Iraq. It is more significant than the other downswings seen through this cycle with prior hurricanes, periods of surging gasoline prices, and the elections.

But in common with all these events we have yet to see a pass-through of consumer fears to actual spending decisions, as mounting consumer angst through this expansion has not, at least thus far, been correlated to movements in the savings rate and spending overall, and when the driver has been gasoline prices, has actually been inversely related to nominal spending swings.

This appears to be the case with retail sales this November, given the hefty boost we expect this month from a 4% surge in gasoline service station sales, and reports of solid holiday shopping, alongside the solid Nov. 27 weekly chain-store data. If November auto sales hover near the levels of the last three months, retail sales should post 0.6% growth this month.

S&P/Case-Shiller Home Price Index

The index fell 0.85% to 195.6 in September (for the 20-city composite), from a revised 197.30 in August (previously 197.16). On a year-over-year basis prices are down 4.95%, the most on record, compared to a 4.3% decline in August. For the third quarter, prices fell 4.5%, also a record amount. Though we have yet to see pass-through of housing weakness to the broader economy, the sharp drop in the 20-city index in September has raised the ante for the housing market.

Credit market turmoil in August and September clearly had an aggravating effect on home price declines over the period, though the reports for the coming two or three months will be critical for differentiating between "disruption effects" of transactions in process and the ongoing downward pressure on prices from the inventory overhang in the real estate market. Yet if even part of the recent accelerated pace of price decline lingers, and filters into the median price data for the new and existing home sales reports, prospects for stabilization in the market with the 2008 spring home-buying season will diminish.

Englund is principal director and chief economist for Action Economics.

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