As if a toggle switch had been flipped late last year, Americans suddenly gained confidence in the economy, to levels not seen since before the Financial Crisis. But now, it’s all unraveling again.
The jump in third-quarter GDP was in the news during the fall. “Escape velocity” was being reached, Wall Street soothsayers said. The price of gasoline was dropping, and people were actually able to save a little instead of spending it all, to the greatest exasperation of the same soothsayers, and to equal exasperation of politicians, corporate executives, and others.
It was a time when consumers were finally gaining back some confidence in the US economy, and they were feeling pretty good – some because their lives were on the right track and others because they got tired of feeling bad and had adjusted to their new but lower reality. They’d come a long way.
During the financial Crisis, Gallup’s Economic Confidence Index plunged to an all-time low of -65. The index is the average of how Americans see the current economic conditions and whether they think the economy is improving or getting worse. It has a theoretical maximum of +100 (everyone says the economy is “excellent” or “good” and “getting better”) and a minimum of -100 (everyone says the economy is “poor” and “getting worse.”) So -65 got pretty darn close to the theoretical minimum!
During the subsequent “green shoots” period, the index rose as high as -18 by early 2011 before re-plunging to -54 by fall that year. The debt ceiling fight, the possibility of a government shut-down, and talk of default were gracing the media. When the charade was over, economic confidence climbed out of the pit.
By mid-2013, the index was back up at (a still lousy) -3. But in the fall, it re-plunged to -39 in response to another debt-ceiling charade. This too passed. In 2014, the index meandered mostly between -21 and -14, until the end of the year when it began soaring. By early January, it hit +5, the highest since before the Financial Crisis.
But then the air hissed out of it. A week ago, the index hit -3. And for the week ending May 3, the index plunged 6 points to -9, the lowest since December and the worst weekly drop since last July:
Current conditions dropped to -5, with 24% considering the economy “excellent” or “good” and 29% considering it “poor.” But economic outlook plunged 8 points, to -12, the lowest since November, with 54% of Americans saying the economy is getting worse. That’s what “dragged down” the index, as Gallup said. Suddenly, the future looks less rosy.
Gallup blamed the stock market that during the week before the survey “had been fraught with market losses.” Tiny ones, it must be said, that left stocks near their all-time highs.
Then there were the rising prices at the pump. The price of crude oil has bounced, and the seasonal upswing in gas prices is underway. Gallup determined that indeed, “confidence in the economy is related to how much they pay at the pump.”
And it blamed the ugly first-quarter GDP that surprised Wall Street soothsayers and CNBC talking heads, though it had been predicted by the Atlanta Fed and other data points that we published right here throughout the quarter [read… Atlanta Fed’s “GDP Now” Model Totally Nailed Ugly Q1, “Blue-Chip” Economists Ludicrously Optimistic].
And some of this, as Gallup writes, “may have dampened consumers’ economic hopes.”
Hopes!
But here is the thing: if Gallup is correct in blaming the drop in economic confidence on the slight losses in the stock market that was still near its ludicrously lofty all-time high, how are Americans going to react when stocks are once again subject to real gravity, as they’ve always eventually turned out to be?
But that will never happen; the Fed has that under control; that’s the official message. And there may be more good news coming to perk up economic confidence, including the jobs report on Friday, Gallup says. “Unless the economic news continues to be bad, Americans may soon forget about the weak first quarter GDP and rising gas prices….” Hopes – so that they can go into the summer with a confident smile.
But there may be more issues waiting to unfold because gloom has hit the shipping business. Read… China Containerized Freight Index Plunges to Multi-Year Low, Shanghai-EU Rates Totally Collapse, US Rates Morose
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The average working guy knows what is really happening. No amount of cheer- leading is going to convince me otherwise. The stock market only affects theoretical paper weath assuming you have enough earning ability to invest (gamble). For those of us in the bay area, housing inflation is quite high, healthcare is quite high and our taxes are high. If you add the H1B visa’s taking our jobs and the off shoring of our work you can easily paint the picture.
Wolf thank you for the clarity in these articles. I enjoy your work.
Right now with all of the political garbage going on in Washington & around the world I am starting to feel like that Frenchman in the photo watching the German Army marching through Paris in 1940.
The Republicans who I had hoped would make a difference turned out to be a 5th column working for Obama & helping him with that trade bill Washington is secretly working on!
They have given up the pretense of being the political opposition.
As of now I have the sinking feeling that we are living in occupied territory & have been conquered by the International financial elites!We have no elected representation!
The Government in Washington is America’s version of the French Vichy government France in 1940.In France they ruled by the consent of the Nazi’s.Today Washington politicians are ruling by the consent of international big business,….& the public be damned!
The only hope I see is the looming Depression coming our way.
It will be rough for all of us,but perhaps it will kill off Oligarchs & Plutocrats who have conquered America.Then we can rebuild!
Right now I am rooting for the depression!
I think the upcoming election is irrelevant in terms of which candidate wins. The real power now is in the party, the money machine. Last time the GOP put up Romney, an empty suit, because he looks a bit like Reagan and they thought the base would fall for it. Now they don’t even care which candidate fronts for them as long as the candidate attracts votes. The same thing is going on with the democrats. The Clintons don’t care about the presidency. They don’t want Obama being the head of the democratic party and running the money machine. They only way to get their attention is to vote for a third party candidate or write someone in as a dissent. Let them see you stood on line but didn’t fall for the bs that we have a representative govt.
True. What I find fascinating is the whole affair with H1B (and now L1 to help drain some trade jobs like plumbers, office workers). Specifically how easily one career group of Americans (human resources) sells out a different career group of Americans. I guess they cannot grasp that when you help take down one group, the eventual result is they end up taking down themselves, too, due to economic forces they help catalyze. Take the video below as an example – shows HR happily training on how to sell out their counterparts:
https://www.youtube.com/watch?v=TCbFEgFajGU
I read tech want ads in FL for amusement. They ask for experience with multiple operating systems and long list of programming languages. Most Phd’s in CS wouldn’t qualify, then they offer $10 an hour, no kidding. Every time I see a politician advocating for increased immigration I think they should be charged with treason, no kidding.
I am trying to understand why longterm bond yields and commodities prices would be spiking (copper, aluminum, as well as oil) in an environment where data on economic activity from the US and Asia is so weak, and Europe is barely crawling.
None of the explanations that I have seen seem close to explaining the magnitude and rapidity of the shift over the past week in particular. They all sound like ex post rationalizations.
Once you get inside the mind of the madman, it’s actually rather easy to understand.
Over the past six years, dips in all markets haven’t lasted long. The reason is threefold.
First, in a world were many assets were seen as going only upwards “buying the dip”, no matter how ridiculously low, was seen as a sure way to make even more money. Once upon a time you waited until the dip was at very least 5% before buying: buy low and sell high. Now any dip is seen as a one time buying opportunity.
Second, most asset classes are now seen as overpriced even by massive hedge funds. They have little room to go upwards because not only the law of diminishing returns is making itself felt, but the pool of greater fools (mostly meaning mutual funds and retail investors) is drying up. Let’s be honest: which retiree or young couple can afford Apple stocks and German bund at those prices?
Third, inflation. There’s no beating around the bush: with a currency war unfolding, prices are heating up everywhere. Goods whose price is mostly made up by commodity prices and which are very inflation-tied (like fresh fruit) have shot skyward in the past three months.
Now, everybody (including bank people) is asking me why, with oil prices almost half what they were in 2008 in absolute terms, we pay fuel 20% more. Or why with China drowning in industrial overcapacity the prices of shirts and skirts have actually increased. Or why with rows upon rows of unsold houses waiting for a buyer housing prices don’t budge.
The reason is astonishingly and dramatically simple: 2008 changed everything, absolutely everything.
Once upon a time, when supply outpaced demand, prices had to drop to allow the two to rebalance. It was called price discovery. Now prices aren’t allowed to adjust themselves (apart from upwards) because price discovery doesn’t exist anymore. The very fundamentals of any economic system are completely broken.
But the most important reason is psychological. People holding the purse strings do not want to see the casino lights have started to go out in late 2013.
They took no notice the most massive bubble in history (China’s housing) has started hissing air.
They took no notice price discovery is so broken even basket cases such as Italy and Spain pay lower interests on their 10-years sovereign bonds than the US. Think about it for a moment.
They are desperately holding to the idea sometime in the immediate future there will be a consumption-driven boom, and hence are buying copper and aluminum which will be needed to manufacture all those goods people will line up to buy. The frankly ridiculous boom in US inventories is driven by expectations people struggling with declining real wages or leveraged to the hilt will go out during the Summer and shop until they drop.
This is how detached from reality speculators have become: they saw an auto loan boom (even more ridiculous than the 2003-2008 one because fundamentals are so much worse) and shouted “green shots!”.
Also don’t rule out old fashioned greed and stupidity, which very often go hand in hand: Wolf has detailed very well how shipping concerns swimming in overcapacity are pumping up prices. They won’t last long.
China is already taking moves to subsidize her own shipping industry (even further): those concerns expecting to get fat on frankly ridiculous price increases are in for a rude awakening.
After China makes her move, expect other Asian countries to follow and Europe to jump in to avoid her shipping industry getting clobbered.
For what it’s worth, I believe the Fed (with help of Goldman and JPM) collude to manipulate prices via the futures markets. Pretty certain it’s done for gold and no reason they wouldn’t do for other commodities (within their capabilities). When the supply/demand gets way out of whack, then the market forces will trump (like oil). But just like the stock market, they can manipulate it up or down on the margin with futures contracts.
Once you start seeing company’s (or country’s) bonds going into default, it becomes evident that the current rate of interest offered is insufficient protection against loss of capital, and rates go up, as in double digit for Banana Republics
It’s just the weather.
Re: It’s just the weather.
+1
Tosh, Cordelia, you are trying to apply logic to an insane asylum. Think of a two year old child throwing a temper tantrum, and shouting “BUT I WANT IT NOW!” Now imagine the two year old works for The Fed, or the Central Banks, or the ECB, or runs a union, or is Jeffery Imelt. Or is your neighbor whining that it’s YOUR responsibility to feed her child. The only meaningless word in the above scenario is “imagine”. There is a word that would shut down the whole shebang. The word is NO. Will you vote for me so I can help you rob your neighbors? NO! Will you contribute a dollar to the Red Cross or the United Way so your employer can plead that the Looters won’t think he’s a Greedy Capitalist? NO! Hey buddy can you spare a buck? Multiple choice: 1) NO! 2) GET A JOB! 3) I GAVE IT TO WASHINGTON GO APPLY FOR RELIEF!
Get the idea? They’re using your good will to buy votes and then DAMNING YOU for whatever success you’ve achieved. Don’t give them your sanction. Make them face reality. As Nietzsche said, there are too many antidotes.
Regards, JULIAN
Cordelia, maybe speculative power (wealth stolen from people) is trying to overcome trouble (world recession).
Does anyone have any reliable data on credit card balances currently carried by the US consumer?
I was in a Best Buy store yesterday and they claim they are remodeling the store, but it felt more like they are slowly selling everything off. The merchandise on the floor was definitely sparse. I only mention this because two weeks ago I walked into a Tiger Direct store and was shocked to learn they were liquidating and closing most of their stores. It’s starting to look like a pattern.
Confidence plunges? Who are the morons they survey to ‘discover’ confidence has plunged? I don’t know anyone whose confidence has risen since before 2007.
I really wish those suffering from the H1B ‘problem’ would get over it. If you had any historical perspective you would know that the US has been bringing in foreign nationals with technical expertise for decades. The only thing that changes is what particular discipline it is…well, that tends to be where the demand is. What a surprise! Now that it is hitting the IT labor pool – that I suppose you belong to – its time to become a squeaky wheel, huh?
Where were you when it hit engineering (pick a discipline, any discipline) or medicine or finance or university professorships? There’s nothing new under the sun, kiddies.