Weak consumer confidence and real wage growth portend weak consumer spending
Yesterday the Conference Board released its measure of consumer confidence, which dropped to 44.5 in August. This brings the Conference Board measure of confidence in line with the Reuters/University of Michigan measure of consumer sentiment. Bloomberg summarizes the Conference Board results.
Confidence is important, since consumer spending accounts for the lion’s-share of aggregate spending. Consumer confidence measures are highly correlated with the annual growth in real personal consumption expenditures – the correlation coefficients are 75% and 67% for the University of Michigan Sentiment index and the Conference Board’s Confidence index, respectively.
(Chart axis identifcation amended…rdan)
Ultimately, though, it’s all about jobs and personal incomes.
READ MORE AFTER THE JUMP!
To date, while July real wages and salaries (deflated using the CPI) fell on the month, the 3-month average continues its ascent. Clearly the sluggish climb in real wages and salaries is not enough to spark a surge in confidence and spending. Neither will consumers draw down saving, as was the case over the last decade amid debt-financed consumption. In fact, saving is more likely to rise as a share of income than fall as the balance sheet repair process furthers.
Jobs and incomes will drive consumption.
To be sure, measures of confidence are “better” predictors of economic activity when the economy is fragile. We know that the economy is now much more fragile than previously thought. Weak confidence plus meager real wage and salary growth is, unfortunately, a harbinger of further ‘weak’ economic activity.
i was a little surprised to see that spending rose .8% in july (admittedly before the confidence collapse) especially in light of stagnating income growth…i figured it must be all credit…but this morning i ran into the stunning LPS mortgage monitor reports at calculated risk & at mish’s…more than one in 8 homeowners are not making house payments, and the 4.11% in foreclosure have been delinquent for an average of 599 days…there was a lot of talk about mortgage defaults as a driver of consumer spending a year ago, but it dropped off the radar…clearly, its still a factor, and with the backlog in the courts, will be for some time to come…
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