Consumer confidence fell 3.8 points in May to 64.9, marking the third drop in a row. While the slide is disappointing, confidence had spiked in February and some payback had been expected.
Déjà vu All Over Again
Consumer confidence fell 3.8 points in May, marking the third consecutive monthly drop and largest monthly decline in seven months. Although we were projecting a small decline, May’s 3.8-point drop came as a bit of surprise to the financial markets. The consensus was expecting a small increase, particularly after Friday’s surprisingly strong University of Michigan consumer sentiment report. Our thought has long been that the consumer confidence numbers were somewhat biased to the upside earlier in the year by the unseasonably mild winter weather and a quirk in the seasonal adjustment process related to the unusual depth of the 2007- 2009 recession, which saw some of the largest drops in confidence occur during the fall of 2008 and winter of 2009. The low for consumer confidence was hit in February 2009, at 25.3, and the two best months for consumer confidence over the past year and a half were February 2011, at 72.0, and February 2012, at 71.6.
Aside from these seasonal quirks, consumer confidence seems consistent with an economy growing at around a 2.0 percent pace. The overall index has averaged a measly 58.8 over the past 12 months. That pace, however, includes last summer’s plunge that followed the debt ceiling debacle and downgrade of the U.S. sovereign debt rating. Aside from that slide, overall consumer confidence appears hovering somewhere around 65 and 70.
Consumers are dealing with an awful lot of crosscurrents. The headlines have generally been terrible, particularly those dealing with Greece and Spain. The domestic headlines have not been nearly as threatening. The unemployment rate has continued to trend lower and gasoline prices have fallen, which is a huge relief going into the peak summer driving season.
The lingering anxiety over the European financial crisis and recent slide in stock prices may have caused some consumers to feel a sense of déjà vu. While it seems like we have been here before, in many ways we have never left. We are no closer to a resolution to the crisis in Europe today than we were last summer and another hike in the debt ceiling limit awaits
congressional action, following little to no progress at reducing the federal budget deficit. Moreover, while the unemployment rate has continued to decline, job growth remains tepid at best, and a large portion of the jobs being created continue to be low paying professions. Real after-tax income per person has been flat for the past two years.
There was one bright spot. Buying plans for cars and major appliances rose in May and plans to buy a home essentially held steady. Apparently consumers are becoming accustomed to the subpar economic recovery and moving forward with purchases put off when worries about employment and income were even greater than they are today. With income growth stagnant, consumers have turned to debt to finance these purchases.
Wells Fargo Securities