......Consumer Confidence..... Dow Monthly % Return
Dec 09..... 52.9..... 1%
Jan 10..... 55.9..... (3.48%)
Feb 10..... 46..... 2.55%
Mar 10..... 52.5..... 5.13%
Apr 10..... 57.9..... 1.4%
May 10..... 63.3..... (7.9%)
Jun 10..... 52.9..... (3.54%)
Jul 10..... 50.4..... 7%
Aug 10..... 53.5..... (4.3%)
Sep 10..... 48.5..... 7.95% (MTD)
Oct 10..... 55?...... (8%?)
What is interesting here is that Consumer Confidence has a simple observational correlation with prior month equity returns as measured by the monthly change of the DJIA.
So, today's 48.5 should probably be understood within the context of the August slide in equities rather than the current month's performance. The only thing that I find surprising is that the consensus expected a higher reading (at 54) than August's 53.5, despite the fact that the equity market was down in August.
There are of course thousands of intangibles re: consumer confidence, but as Bernanke seems to believe strongly in the wealth effect, I believe its worth reviewing just how closely Americans watch the equity market for cues about the current and future state of the economy. If correlation between these two figures showed no directional relationship, then one must conclude that the Fed is risking hyperinflation and a lower quality life for middle class Americans without any lasting (or even near month) return (in regards to increased consumer spending, slower household sector deleveraging, etc.. Thankfully, it at least seems that there is, at minimum, a casual next-month correlation.
Go POMO!
So I plotted the delta in the CC reading with the previous month's DJIA as the dependent variable and came up with an r squared of .401. Not exactly an ironclad relationship, and doesn't pass the statistical significance test, but there is at least something there, given the paucity of the data set.
ReplyDeleteIn fact, that level of correlation might be considered surprising to economists running advanced models of consumer behavior.
The question is, as always, does goosing consumer confidence actually affect GDP, given the amount of deleveraging both in credit supply and on the household side. I mean, every couple g's of consumer dollars pumped into the economy means another job in China, not in Toledo. I guess Ben figures if the fiscal authorities are retrenching on investment, this is the only lever left to pull.
Interesting. Thanks for running the numbers. In the past, there has been a historic correlation between consumer confidence and durable goods orders. This has not only been shown by the data, but also makes common sense. If uncertain about the economy, job security, etc, then its likely that capital goods purchases will be delayed until confidence is restored.
ReplyDeleteThis link has been somewhat broken however (I have seen a study suggesting the link was broken sometime in the early 90's (SNL Crisis maybe??)) as consumers have been deleveraging for 9 consecutive quarters (regardless of swings in cconfidence which are usually just noise unless > 5 points.)
I don't believe that the stock market is the appropriate thermometer for the health of the economy anymore, especially as it is probably the most obvious symbol of divergence between Sarah Palin's proclaimed "Real America" and the top 20%. Earnings increasing on operating margin leverage (that is the result of 'real Americans' losing their jobs) and enriching those who own stocks not only doesn't drive confidence, but in fact probably results in growing class tensions and an ever weakening consumer base.
On BC's call yesterday they mentioned that they will see 30-40% leverage on new revenues over 200,000 industry units due to plant closures, etc. While an equity investor cheers this operational efficiency, one must keep in mind that in order to capture this leverage, the company must actually increase the top-line. But they are contributing to shrinking disposable incomes in their target markets as they lay off the same people who are likley to be their best customers. How much goodwill is lost in these plant closures? When did we lose the brilliant Henry Ford concept of paying your workers a salary that allows them to purchase at least the products that they help to produce??
Trade restrictions and calling China a currency manipulator doesn't address the root of the issue. It is the outsourcing of jobs to China and not their exchange rate that is to blame for our failing manufacturing sector and structural unemployment. But pointing the finger at China is so much easier isn't it? Flame the flames of xenophobia, not domestic class struggle, right? A primary example of all this was Ford's announcement to build a new plant in China yesterday. Meanwhile, the House of Representatives passes a bill that will allow US companies to 'fight back' against China's currency manipulation which is stealing our jobs/competitiveness. Wow. Does anyone pay attention these days, or are we too focused on Lindsay Lohan's latest incarceration????
I think the exercise above is an attempt to have a philosophical discussion about the health of the economy when we export jobs and view a casino as the primary reflection of our industriousness.
As always, thanks for reading!
From Wikipedia, the Gini coefficients of the United States over time. We are well past the roaring twenties.
ReplyDelete* 1929: 45.0 (estimated)
* 1947: 37.6 (estimated)
* 1967: 39.7 (first year reported)
* 1968: 38.6 (lowest index reported)
* 1970: 39.4
* 1980: 40.3
* 1990: 42.8
* 2000: 46.2 [7]
* 2005: 46.9
* 2006: 47.0 (highest index reported)
* 2007: 46.3
* 2008: 46.69
* 2009: 46.8