Consumers are losing confidence

On Tuesday, July 27th, the Consumer Confidence Index (CCI) was released. The CCI is a closely followed economic indicator, calculated by The Conference Board (a not for profit research organization for businesses), that measures how optimistic or pessimistic consumers are with respect to the economy. American consumers are one of the watched and courted groups on our planet. Much of our global economy is sustained by America’s voracious appetite for consumer goods.

Here is an amazing fact: Consumerism (the personal spending on cars, clothes, food and other items) accounts for 71% of the United States’ gross domestic product (GDP), which in turn represents 18% of the world’s GDP. In a world where Americans only make up 5% of the population, that number is enormous.

Therefore, the spending habits of Americans are of the utmost importance and are closely tracked. Manufacturers, retailers, banks, and the government monitor changes in the CCI in order to factor in the data in their decision-making processes.

The CCI is a number reported once every month. It is calculated using information taken from a survey that is given to 5,000 households. The survey consists of five questions that ask the respondents’ opinions about business conditions, employment, and income during the present time and for the next 6 months.

A higher CCI number shows consumers optimism in the economy, which will lead to the purchasing of more goods and services, thus stimulating the economy. A lower CCI number represents a pessimistic outlook and slowing economy. A CCI reading of 90 or higher indicates a healthy economy. In 2007, when the Dow Jones Industrial Average hit all time highs, the CCI was roughly 110. When the stock market hit the lows during the first quarter of 2009, the CCI was roughly 25.

On Tuesday, the July CCI came in at 51.0, the lowest reading since February. In June the CCI was 54.3 and in May 62.7. As you can see we are facing a multi month decline in consumer confidence.

This is an ominous sign. Month-on-month decreasing CCI signals that consumers will avoid retail purchases, particularly large-ticket items that require financing. Manufacturers may pare down inventories to reduce overhead and/or delay investing in new projects and facilities. Likewise, banks can anticipate a decrease in lending activity, mortgage applications, and credit card use.

It feels like Americans are more pessimistic about our future than during any other time in my life. This pessimism could exacerbate our problems even further. What America needs right now is something to be excited about. I believe a rising stock market is our best hope. Earnings from US companies have been above average for Q2 and the S&P 500 is holding at critical levels right now. Within the next 10 days 2 more major economic numbers will be released; the GDP figure on Friday, July 30th and the jobs numbers on Friday, August 6th. The GDP consensus is 2.5% and the consensus for unemployment is 9.6% and Nonfarm payrolls -116,000.

With all that’s going on in our country and throughout the world (the Gulf crisis, Afghanistan, Iraq, etc.), I think we could all use some good news. Let’s hope that these economic numbers exceed our expectations. If so, this could lead to a slow but steadily rising stock market, which could give Americans some optimism for the future; and maybe, just maybe, give our consumers a little confidence.