The Case Shiller 20-City Index rose 5.7% over the last 12 months, which is up from the 5.5% year-over-year gains posted the previous month. In my little experience, I am seeing that rising home prices and rising interest rates are making it increasingly difficult for low income families to purchase a house. Though the value of goods in most sectors is increasing, there is a buyer for just about everything out there for sale. Consequently, Consumer Confidence swelled well past the 113.3 expected index reading to an astonishingly high 125.6. Consumer spending accounts for 2/3 of the economy, so a positive outlook is a big deal , because it typically leads to big spending later on. The danger to the mortgage market is that with increased spending and higher prices comes inflation, which always pushes interest rates upward.
Hesitation is that thing that mother nature gave us to protect us from ourselves. It saves us from the potential for pain, which also prevents our growth and inhibits our burgeoning character. Wow, that was deep for a Friday morning! Nothing gets me waxing philosophical like the contemplation of spending money.
The monthly reading of Consumer Sentiment was released today. This survey measures consumers’ attitudes and expectations of both present and future economic conditions. In a lab, Consumer Sentiment should predict Consumer Spending, including Retail Sales. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend their hard-earned money, and vice-versa. Since 2/3 of the economy is in the palms of consumers’ hands, it’s kind of a big deal. And everybody knows that the outlook for our economic growth in the U.S. is still…well, let’s call it “hesitant”.
Today, Retail Sales are up 0.5% over last month, which is always nice to see a positive number there. The dangerous prospect for this quivering little plant in our collective hands is in the outlook for the future of consumer spending. The Consumer Sentiment released this morning shows that our propensity to spend money this month actually dropped almost 4% since the last reading four weeks ago. Consumer Spending is just one piece of economic data, but it is considered to be one of the foremost important, as well as one of the best indicative precursors of that which is to come.
Sometimes charts are boring, and sometimes they are telling–which makes them interesting. This chart maps the trend in Retail Sales over the last 22 years, overlaid with periods when our U.S. economy experienced periods of recession. What strikes me in this picture is that over the last two decades, the two previous recessionary eras coincided with a stagnation in consumer spending–when Retail Sales failed to grow at a two percent annual rate. This year, we have dipped down below that number, and we continue to hang down under that 2% mark. Retail Sales are important because that’s where the rubber meets the road, so to speak. It’s not a survey that can be impacted by a caller’s bad mood like some other prognosticators. This is showing that we aren’t spending money, and a lack of spending leads to a lack of productivity. The “velocity of money” comes to a halt. So go buy some stuff and then give yourself a high-five for being patriotic. Better yet, go buy a house and get a big loan and then I’ll go buy some stuff. 🙂