Tuesday, November 25, 2008
Early last month I argued that consumers are gloomy about the recession, rather than the recession and the financial crisis. The ABC consumer comfort index showed that perceived consumer finances were relatively unchanged.
Well, since October 12 that has changed. Alongside a deteriorating labor market, wouldn’t this list create gloomy consumer finances?
October 3 2008 – Treasury Asset Relief Program (TARP) passes as an asset purchase program, where the Treasury will purchase troubled assets from banks.
October 5, 2008 – Secretary Paulson turns part of the TARP funding into a direct recapitalization of banks. The public/banking system – and suggested by Bernanke – assumed that the remaining funds would be used to finance the asset purchase program (TARP).
November 13, 2008 – “Treasury Secretary Henry Paulson officially abandoned his original plan to buy troubled assets from financial institutions. While the government will continue to invest in those firms, he said, it would also now focus on the nation's struggling consumers.”
November 18, 2008 – “In an interview Monday, Mr. Paulson said the financial system is stabilizing, and he is thinking about how the remaining $410 billion could be best utilized, but that he doesn't plan to tap it unless a further need arises.”
November 24, 2008 – Consumers get the news that they are on the hook for 90% of $309 billion - $29 billion = $280 billion in Citigroup’s losses. This is a risk-sharing program with no return for the taxpayer (except for a few marginal dividend payments and stock shares).
- Bloomberg published a great article on the risks of this bailout.
U.S. consumer confidence probably remained at a record low level in November as falling gasoline prices failed to ease concerns about rising unemployment, economists said before reports today.
The New York-based Conference Board’s index of consumer confidence held at 38 for a second month, according to the median forecast in a Bloomberg survey of 66 economists. That is the lowest level since monthly records began in 1967. Another report from S&P/Case-Shiller may show a record drop in home prices in the 12 months ended in September.
Consumers are retrenching amid increasing job losses, tumbling stock and home prices and the worst credit crunch in seven decades. President-elect Barack Obama said yesterday the U.S. may lose “millions of jobs” next year should the government fail to quickly enact a new economic-stimulus package.
“Serious concerns about job stability and incomes have outweighed the increased confidence consumers were able to derive from falling energy prices,” said Dana Saporta, an economist at Dresdner Kleinwort in New York.
RW: Consumers are gloomy about job stability and income, but now they are also gloomy about the handling of the financial crisis. Consumer confidence is going to stay extremely low while the Treasury and the Fed continue to risk the taxpayer’s hard-earned money in a myriad of new programs. This is evident in the finance component of ABC's consumer comfort index.
ABC offers a weekly comfort index, which includes a measure of personal finances. The overall index measures the answers to the three following questions:
- "Would you describe the state of the nation’s economy these days as excellent, good, not so good, or poor?"
- "Would you describe the state of your own personal finances these days as excellent, good, not so good, or poor?"
- "Considering the cost of things today and your own personal finances, would you say now is an excellent time, a good time, a not so good time, or a poor time to buy the things you want and need?"
My answers would be: Negative; more than recessionary negative; and negative
The chart (above) illustrates the weekly index values for the overall ABC comfort index and its personal finance component. Consistent with the other consumer indexes – University of Michigan and Conference Board - the ABC consumer comfort index is historically low. Furthemore, the personal finance index has initiated its decent since October 12.
As Paulson continues to spends taxpayer money in a way that obviously lacks discretion - essentially flip-floppping from day to day - consumers are becoming anxious about the future of their personal finances. Although the survey questions don’t explicitly tie the banking crisis to consumer confidence, consumers are bound to be affected by it.
It is probable that the average consumer does not follow Paulson’t organic use of the TARP funds, but markets certainly do. And markets hate it when Paulson changes his mind; equities fall further, dragging down consumer wealth and finances.
I believe that consumers are reacting not only to job stability and falling labor income, but also the conduct of policy makers as they spend large sums of money. Their efforts have only marginally iomroved the health of credit markets and consumer finances, and consumers are concerned.