Yesterday, the Conference Board reported that its index of consumer confidence rose to 90.9 in July from 86.4 in June. The latest reading was the highest since October 2007, just before the last recession, and well above the 85.0 expected by economists.
With this morning's better than expected second quarter GDP results, along with upward revisions for the first quarter, it would be easy to get excited about the economic future ahead. After almost six years, the recovery is finally taking hold. Confidence and growth are back.
While that may be true for growth, with regards to confidence the perception of recovery is heavily skewed by income tier. While the average index for July reported by the Conference Board was 90.9, for those with annual incomes greater than $50,000 the measure was 112.1, meanwhile for those with annual incomes less than $15,000, the measure was just 57.7. For those at the top end of the economy confidence has returned to near-peak 2007 levels while for those at the bottom, confidence remains at 2008 economic recession levels.
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Over the past twenty-five years, the confidence gap between the top and the bottom has never been greater. Given the nature of the post-banking crisis recovery, that record is hardly surprising. As Ruchir Sharma of Morgan Stanley Investment Management points out in an op-ed in this morning's Wall Street Journal, loose monetary policy has benefited owners of financial and commodity assets far more than Main Street. While the stock market is up by more than 135% from its lows, "prices for commodities from oil to coffee to eggs are up 40% since 2009, double the typical commodity-price rebound in post-war recoveries. Though rising prices for staples such as these are inconsequential expenses to the rich, they are burdens for the poor, who spend 10% of their income on energy and a third of it on food."
Even more, the post-banking crisis recovery has been notable for its lack of wage inflation. Between excess labor capacity globally and corporations need to extract more and more from their expense base in a revenue-anemic recovery, most lower and many middle class Americans have found themselves squeezed by weak wage growth and rising food, energy and rental costs. Not surprisingly this financial pressure is showing up in weak economic confidence measures like the one that the Conference Board reported this week.
But the impact of weak confidence among lower and middle class Americans can be seen and felt all across the nation. Limited discretionary spending is having a direct impact on dollar store and Wal-Mart (WMT) sales and it has forced the automobile industry to now rely on record subprime financing for car sales. Weak confidence is also altering many Americans' view on immigration and US military involvement abroad., When confidence is weak, self-interest and isolationism dominate our preferences, decisions and actions. We also become more polarized at the polls.
To date, equity and fixed income investors have ignored the potential disruptions arising from weak confidence believing that loose monetary policy can keep the markets afloat no matter the social or political backdrop.
While they have been handsomely rewarded for this belief over the past five years, the current record confidence gap between America's extremes in wealth suggests caution. Populism and economic confidence are inversely correlated and a small economic shock or a further widening of the confidence divide could easily spur social and political actions that put pressure on corporate profits. Falling confidence, and its resulting intense nationalism, will challenge the globalist model of many transnational corporations. Just look at how the downing of MH17 has tested the allegiance of Royal Dutch Shell (RDSA) and British Petroleum (BP); or how the NSA scandal is impacting American technology and telecom companies in Europe. To paraphrase the 19th-century British statesman Lord Palmerston, countries don't have friends, they have interests., And when confidence is weak those interests become very local and "me, here, now" in nature.
While US policymakers are celebrating yesterday's strong Conference Board report and this morning's far better than expected second quarter GDP results, they would be wise to dig deeper into the data. Averages lie and behind yesterday's confidence numbers is a clear image of a recovery for the haves and the sixth year of a recession for the have not's.
French economist Thomas Piketty and others have focused on income and wealth inequality and the wide economic gaps that exist today between the haves and have not's. While those are important, policymakers and investors would be far better served to focus on the confidence gap. It is our confidence level that drives what we do., While largely unseen and unheard today, the underconfident could have a big impact on what happens ahead; and yesterday's Conference Board report shows that there are plenty of Americans who still fit that definition.
Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world.", -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation
No positions in stocks mentioned.
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