Confidence Trumps All

A: It's a messed up world we live in today. With oil backing off recent highs and falling $2.50 this morning, I can see it already...'stocks surge as oil prices fall to $125/barrel'; yea, like that will save us. We have seen Moody's admit to a flaw in its ratings' model, which is now being investigated by the SEC because Moody's failed to fix the error once it was detected; you mean some of those CDO's were not AAA, wow what a surprise. It's a world where surging commodity inflation is not seen in the data because of seasonal adjustments; you mean, it is really there? And it's a world where we have seen 260,000 jobs lost in the first 5 months of 2008, yet the unemployment rate ticks down in the last report; you mean, unemployment is worse than the 5% last reported? Through all the statistical wizardry, the seasonal adjustments, the computer model glitches and cover-ups, and insanity in the oil markets one thing has been consistent ---> confidence is down!

By almost every measure I can find, consumer confidence is at 10-30 year lows. As readers of UrbanDigs know by now, I am very big on consumer confidence and buyer confidence when I discuss the local Manhattan real estate market that I do business in; here are just a few reads on the topic.

* Does A Weaker Dollar Accelerate Foreign Demand?
* Buyer Confidence? We Need A Formula!
* Jobs / Confidence / My Thoughts

The bursting of the housing bubble, the credit crisis, and the commodity inflation shock that we all just went through over the past year or so has done significant damage to buyer/consumer confidence. This is something that does not change overnight. One by one I see it in the indexes that track confidence.

The Conference Board Consumer Confidence Index

The Conference Board Consumer Confidence Index, which had declined in April, continued its downward trend in May. The Index now stands at 57.2 (1985=100), down from 62.8 in April. The Present Situation Index decreased to 74.4 from 81.9. The Expectations Index declined to 45.7 from 50.0 in April.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for May's preliminary results was May 20th.

The Skinny: The Consumer Confidence Index now stands at a 16-year low

Source: TNS The Conference Board

The University of Michigan Consumer Sentiment Survey

A survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

The preliminary report, which includes about 60% of total survey results, is released around the 10th of each month. A final report for the prior month is released on the first of the month. The index is becoming more and more useful for investors because it gives a snapshot of whether consumers feel like spending money.

The Skinny: The University of Michigan consumer sentiment index dropped 3.1 points in May, according to preliminary data. The index came in at 59.5, the lowest reading in 28 years, since June 1980.

Source: Bloomberg

Nat'l Association of Realtors: Consumer Confidence Index

OK, so I am including an index from an organization whose past two chief economists (Lehreah & Yun) are widely criticized for spinning datasets and issuing upbeat forecasts that ultimately led to a loss of credibility.

Still, the consumer confidence index that they gather shows a consistent decline as do the above measures of confidence.

The Skinny: The last reading of 62.30 is down 41.39% from 1 year earlier, and is at the lowest level in the past 15 years; since mid 1993.

Source: NAR

Starting to see a trend here? As housing deflation enters its third year, the crunch that resulted is clear both in the pockets of consumers and in the banks that lend to them. Quite simply, the housing ATM is virtually gone as declining equity in a person's home, as a result of past withdrawals and falling value, is yet to fully impact spending. Banks are making it harder and harder to qualify for a loan and to refinance out of trouble; as they deal with their own balance sheet issues.

On a macro note, it was never really about subprime! This was about decades of growth fueled by a platform of credit and debt spending that was kept going by the innovations on wall street. The party just couldn't go on forever. This credit cycle will prove to be one of the most painful in recent history, and will take years to play itself out. As commodity inflation hits food & energy prices at a time when housing deflation hits consumer confidence, the wallets of consumers will be pinched. This is an overall debt problem that was sparked by subprime and spread to auto loans, credit cards, alt-a, prime, option arms, cosi/cofi, and any other types of debt that were securitized by wall street. You can't have decades of credit allowance and debt building unleash itself in a final 5 year frenzy that inflated the housing bubble, unwind in 10 months.

The system is being tested, and is likely to be regulated in the future. The very environment that allowed house prices to rise 100% in 4-5 years, is gone. Back are the days where consumers will be forced to cutback on spending as confidence falls, debt repairment, and saving whenever possible. Thats right, saving! If anything, a decline in consumer confidence will result in a decline of discretionary spending, only after the credit card noose is put on!

That recovery that everyone expects in the 2nd half of 2008 and from the tax rebate checks, in my opinion will be short lived. The surge in sales volume in some local housing markets after purchases basically stalled for months, will be short lived. I have to agree with the great one, Warren Buffet, and say that this recession will be longer and deeper than most think (story). With confidence so low, housing deflation + commodity inflation, and a weak jobs market, I just don't see how housing will see a sustained recovery. With inventory levels at 11.2 months of supply given existing home sales volume, talk of a sustainable recovery is quite silly. This cycle will certainly be one for the history books!

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