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Consumer Confidence: Deflationary Behavior Is a Risk, Washington Isn't Helping

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Minyanville's exclusive Active International-Toluna Consumer Confidence Survey shows how near-deflation can harm consumer behavior.

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MINYANVILLE ORIGINAL Today, the Conference Board's Consumer Confidence Survey disappointed again, showing that sentiment has fallen to its lowest level since January, when the warm winter appeared to be letting things pick up.

Minyanville's own Consumer Confidence Survey provides some independent insight into what is dragging down sentiment and what this means for the economy going forward.

Last time, we reported on the disconnect between middle-aged consumers that are more fearful and younger people that think that things can only get better from here (let's hope). Consumers' feelings have generally stayed the same, but there have been some notable movements in the data.

Minyanville Contributor Peter Atwater examined the data for us. Here are his thoughts:
Looking at the latest consumer confidence figures, what becomes clear is how much more changes in confidence affect our forward-looking views of the world versus our assessment of the past.
This week, the percentage of consumers suggesting that things will be worse a year from now rose more than 17% to 17.57%. And for those over 55, the figure is almost 28%, versus 23% just three weeks ago. Those are significant increases, but not surprising given where the markets have moved over the same period.
For consumers, the deterioration in forward-looking confidence is likely to result in more deflationary behaviors in which they will wait to buy something more than they have in the past.

Deflationary behaviors are certainly a concern here. Since the last Consumer Confidence Survey, the number of people expecting lower prices for big-ticket items increased and those expecting higher prices decreased. This is in line with rock-bottom inflation numbers. May's Consumer Price Index showed a monthly decline in consumer prices. Even discounting the drop in food and energy prices -- both key concerns for consumers when prices rise -- CPI showed a paltry 0.2% gain. On a yearly basis, CPI increased by only 1.7%, below the Fed's target rate. Perhaps the slide in gas prices has reached consumers.

Though it seems counterintuitive, deflation discourages spending more than inflation. If you are in the market for a refrigerator and the price of that fridge keeps falling every week, you would be silly to buy it today. Multiply this by all potential fridge customers, and you have yourself an inert market and retailers start cutting jobs.

On another front, this is exactly the problem plaguing the housing market. Everyone is waiting for the bottom to buy and waiting for a top to sell. And even if you find a nice price, good luck getting a decent mortgage to pay for it. This market moves with glacial velocity. Today's Case-Shiller home price index showed that housing has gotten cheaper yet again in April. Separate reports show that home builders are putting up more apartments since renting is the only option despite the glut of housing on the market. The buyers are there, the potential sellers are there, but the market is barely budging.

One constant over the past few months: Respondents are very much in tune with the effects that Washington's lack of action has on the economy. Consistently, consumers are reporting that income inequality, out-of-control spending without any plan to actually pay for it, and Congress' stupor when it comes to vital fiscal and economic policy action are major concerns.

The Consumer Confidence Survey was done in conjunction with Toluna and Active International.



Twitter: @vincent_trivett
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