from Peter Radford
Having survived an earthquake and a hurricane within a few days of each other I have a feeling that the economy cannot throw up much to upset me. Neither of those events amounted to a great deal here in New York City: the enormous energy spent by our various bureaucracies and breathless media in the run up to the hurricane dwarfed the rather meager effort of the storm itself which tricked us all and devastated inland areas rather than the more glittery targets here. Still all those boarded up storefronts and taped up windows spoke volumes about the risk aversion of New Yorkers when it comes to their personal belongings. I just wish that those of them who populate the trading desks of Wall Street banks had the same attitude towards risk when it comes to gambling with other people’s money. But that seems like a forlorn hope on my part.
Speaking of forlorn:
Today’s report on consumer confidence is all we need to know about the trajectory of the economy. Confidence sucks.
Dragged down by deteriorating views on jobs, incomes, and general economic conditions the Conference Board’s measure of consumer confidence dropped like a proverbial stone, falling from 59.2 in July to 44.5 in August. To put this in context, in a strong economy the index often reaches the 90+ level, and the drop in August one was of the largest ever recorded.
Add this rotten report to the ongoing hesitancy of business to spend its pile of cash, which is still accumulating and sitting idle on balance sheets around the country, and we see immediately that the threat to the economy is in our collective belief that things have not yet turned a corner.
Despite the mild positive tone that consumers gave the Conference Board about their intentions to buy cars or large durable goods items – both seem set for a slight uptick – the overall message was one of unmitigated gloom. It may well be that, as the Economist magazine rightly points out, the normal causes of recession such as inventory movements, a turn in real estate, a sudden burst of unemployment, or a tightening by the Fed are all absent. Indeed for one reason or another they are all remarkably quiescent. Yet consumers are extraordinarily glum. We are stuck in an economy where the lack of confidence creates the very stagnation that drains away confidence even more. Our risk aversion is way beyond that commensurate with actual economic conditions. Things are not quite as bad as they appear.
One example of what I mean by this is the outlook for inflation. Consumers, according to the Conference Board are expecting an inflation rate of around 5.8% over the next twelve months. But the actual number will be more in the 2.0% range. Given such a high expected number it would be rational for consumers to be spending money to defeat the run up in prices. But they aren’t. They are saving, even though the returns they are getting on those savings are ludicrously below their estimate of inflation. In other words consumers are completely willing to experience a loss on their savings because of their perception of the risks that roam the future economic landscape.
Do consumers know something that eludes the analysts?
It doesn’t matter.
Economic behavior is far from rational – despite the theorizing of mainstream economists whose entire constructs are built on the illusion of rationality. Indeed rational expectations are more quicksand than bedrock for anyone trying to interpret consumer activity. Be that as it may, we are clearly becalmed in a Sargasso like sea. It will take a shot in the arm, and a great deal of effort choose your own cliche at this point – to get us moving with any optimism.
Which is unfortunate given the political theater of our electoral process.
One reason why confidence may have been rocked last month was the depressing spectacle of our elite discussing the debt ceiling in apocalyptic terms when, (a) the debt ceiling was irrelevant and unimportant, and (b) what really matters is the outlook for jobs and incomes, neither of which have received serious attention for months. When a nation is this badly led, and when an elite is this divorced from reality, it is almost certain that voters will react with alarm and nervousness.
So we are left trying to find bright spots within the despair.
Here’s a perverse one:
All that storm damage will have to be fixed. That implies a spurt in construction. This will amount to a mini stimulus in those states hit the hardest. Whether it will offset the loss of business from storm damage I cannot tell: but at least it’s a nugget we can cling on to as our elite meanders about in the desert trying to avoid being grown up about the real issues.
When confidence sucks this much it’s these little things that can brighten our days. One thing’s for sure: Washington won’t.