The Inexplicable American Consumer Takes A Breath

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Consumer optimism has been rising from the horrid multi-year lows in August and has reached the highest levels since, well, May. It whipped hope into a froth. Rising confidence would pump up consumer spending, which would pump up everything else. But the inexplicable American consumer, the toughest creature out there that no one has been able to subdue yet, had other plans.

The Thomson Reuters/University of Michigan consumer sentiment hit 74.0 today, up from 69.9 in December, up for the fifth month in a row. Similarly, the Conference Board Consumer Confidence Index (December 27) rose to 64.5, a big jump from the multi-year low of 44.5 in August. And Gallup’s Economic Confidence Index (January 10) rose to -27 from its low of -54 in August.

Consumer confidence is an ugly story. The Conference Board Index peaked at 140 during the period of 1999 to 2001. Back then, it was fun being a consumer. Everyone had a job, money markets actually made money, most yields were higher than inflation, stocks were shooting up, and even when they were crashing, everyone knew they’d reverse soon and make new highs.

Then consumers discovered reality. Confidence began to unravel with sharp drops from 2001 to 2003, followed by mild upswings from 2003 to 2007, and a collapse by early 2009, when it dipped into the 20s. Since then, it has been rising, reaching the 70s in early 2011. But over the summer, it collapsed again to 44.5.

August was a horrid month for confidence, and yet, the inexplicable American consumer pulled out a stack of credit cards and went shopping … though real income (adjusted for inflation) continued its morose decade-long decline. The shopping spree lasted through Thanksgiving.

In December, plot twist. The trend reversed. Though consumer confidence shot up, the toughest creature out there took a deep breath. Retails sales ex-autos declined from November by 0.2%. Sales of electronics dropped by 3.9%, online sales edged down 0.4%, and sales in malls were down 0.8%. Including autos, which had a good month, sales rose only 0.1%. Out the window are the projections for a strong end of the holiday season. And it could be the beginning of another downdraft.

Gallup shed some light on this from a different angle. With a poll of open-ended questions, it tried to determine what worried Americans most about the national economy. Top three: “Jobs/unemployment” 26%, “National debt/Federal budget deficit” 16%, and “Continuing economic decline/Economic instability” 10%.

Jobs, still. Despite ceaseless rhetoric from the White House about the millions of jobs that it had created somewhere, the job market has improved only slightly. The BLS’s Employment Population ratio, which measures the percentage of people age 16 and older who have jobs, is the least corruptible employment number the government makes available. At 58.5%, it’s only a fraction above the 58.1% from August, which was the worst reading since 1983, and far below its peak of 64.7% in April 2000.

In California, the numbers are similar. Peak employment occurred in January 2008, according to the BLS, when 17,023,322 people were working. The trough occurred in August 2011—yup, just five months ago—when only 15,830,729 people were working. However, the unemployment rate has been improving for a year. The difference: statistical adjustments. Not jobs created.

But White House rhetoric works: 34% of the respondent in the Thomson Reuters consumer sentiment survey had heard about the improving jobs situation. That’s up from 21% in December, and a record in the history of the index. But rhetoric alone can’t make up for a tough job market and falling real wages—and falling real wages are now part of the official White House dogma, according to a White House paper. But please don’t tell the rank and file!

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