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Consumer Confidence Posts New Low

Tue, Jan 27 2009, 21:52 GMT
by Northern Trust Economic Research Department

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Consumer Confidence Posts New Low

The Conference Board’s Consumer Confidence Index fell to 37.7 in January from 38.6 in December. This is a new record low for the series which dates back to February 1967. The two subcomponents -- Present Situation Index (29.9 vs. 30.2 in December) and the Expectations Index (43.0 vs. 44.2 in December) -- declined in January. The grim headlines and media coverage of the financial and economic turmoil and staggering layoff announcements justify the sober consumer outlook.

Lest we lose sight of details in the overall grim picture, the index tracking whether jobs are plentiful moved up slightly (7.2 vs. 6.5 in December) and the index measuring if jobs are hard to find fell faintly (41.1 vs. 41.5 in December). These details and the gain in the Index of Leading Indicators during December are tentative signals we are watching closely.

Home Prices Continue Downward Trend, but Pace of Decline is Tempered

The Case-Shiller Home Price Index fell 2.2% in November following a similar decline in October. The year-to-year change is appropriate here because this is a seasonally unadjusted index. From a year ago, the Case-Shiller Home Price Index is down 18.2% after registering an 18.1% drop in the prior month. It is true the year-to-year decline is a tad larger in November vs. October but the pace of the decline is indeed tempered.

Six out of the twenty metro areas (Los Angeles, Miami, San Francisco, San Deigo, Denver and Cleveland) show a smaller decline in home prices during November compared with October. The moderation in the pace of declines in home prices is good news. We need to see a reduction in inventories of unsold homes for a complete turnaround in the housing market.

Euro-zone: Is That Light at the End of the Tunnel?

Today’s Ifo and last week’s Belgian leading indicator offer the tantalizing hope that the economic downturn across the Euro-zone is starting to bottom out – but one month is not enough to call a trend, and the ‘zone in general, and Germany in particular, are still likely in for a rough first quarter of 2009.

First, the Ifo index in Germany. The headline business climate index edged upward from 82.7 in December to 83.0 in January, the first improvement in eight months. While the current conditions sub-index continued to deteriorate, slipping from 88.8 in December to 86.8 in January, the expectations sub-index rose from 76.9 to 79.4. The assumption is that monetary easing from the European Central Bank (ECB), combined with the government’s recent fiscal stimulus package, have restored some stability to the economy, allowing businesses to see some light at the end of the tunnel. Nevertheless, the difference between the current conditions and expectations indices remains wide, suggesting that the economy will contract again in Q1 2009 and that the government’s latest forecast of -2.25% real GDP growth this year is about right.

Which takes us to our favorite Euro-zone leading indicator, the Belgian National Bank’s (BNB) business confidence indicator. As we’ve noted before, thanks to Belgium’s strong trade ties with its neighbors (about 80% of Belgium’s manufacturing output is sold abroad, mostly to fellow EU members), the BNB’s business confidence index is a reliable leading indicator – about six months out – for GDP growth in the Euro-zone as a whole.

Having crashed to a record-low -31.3 in December, the overall confidence index managed to nudge up to -27.7 in January, as confidence improved somewhat in the manufacturing sector (from -36.5 in December, to -30.3 in January). The data hint that the worst of the deterioration is over, but this is not the same as recovery. It is most likely that what we are seeing is some stabilization at low levels with a clear improving trend in the indicator unlikely until sometime in Q2.

The Belgian and German data imply that the Euro-zone as a whole will see a marked contraction in Q4 2008 and Q1 2009, flat-to-negative growth in the middle of the year, and a sustained improvement finally underway by Q4. But given the speed with which demand collapsed across the region in recent weeks, the risk for this outlook remains to the downside.

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Published on  Tue, Jan 27 2009, 21:56 GMT

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