From Home Furnishing Business
Statistically Speaking: Consumer Confidence Slows in the First Quarter
Consumer Confidence as measured by The Conference Board has been showing the first signs of stress over the last few months, coinciding with the government shutdown last December and January and fluctuations in the financial markets. Despite an upswing in February of 9.7 points and a downswing in March of 7.3 points, confidence still remains high at an index of 124.1 (Table A).
But while consumers are staying relatively optimistic, CEOs have been generally pessimistic over the last six months. According to the Conference Board’s March report, CEO confidence during the first quarter of 2019 was 43 – up 1 point from last year’s fourth quarter. Note that a reading of more than 50 points reflects more positive than negative responses. In the fourth quarter of 2018 the CEO confidence was at its lowest in six years. After years of recovery and huge Consumer Confidence Index (CCI) increases, current Consumer and CEO Confidence point to an overall perception of moderation in economic growth. This article picks up from Statistically Speaking’s November 2015 article Consumer Confidence Drives Furniture Spending.
As shown in Table B, the Consumer Confidence Index declined in March, after increasing in February. The Index in March stands at 124.1 (1985 = 100), down 7.3 points from 131.4 in February. Other indexes tracked by The Conference Board get less attention than the CCI, but nonetheless offer additional perspectives. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – declined 12.2 points, from 172.8 to 160.6. Though this index shows a decline, again indicating a possible moderation in growth, the numbers are still high. The Expectations Index – based on consumers’ short-term outlook for income, business and labor market conditions – decreased from 103.8 last month to 99.8 this month.
Since the bottom of the Great Recession in 2009, the U.S. has experienced continuous and historic growth. Although year-to-date Consumer Confidence in 2019 has taken a dip from the high of 130.1 (average) in 2018, confidence continues to be high at 124.1 in March (Table C).
Table D shows the swings in consumer attitudes over a given year. Each year since 2013, the annual average index finished higher than the previous year. March of this year saw confidence dip slightly below March 2017 and March 2018.
Historically, consumers appear to be most confident in the third quarter of each year, and the least confident in the fourth quarter. The average confidence level from 1970 to 2018 was 94.1 in the third quarter, compared to 90.9 in the fourth quarter (E).
Consumer Confidence and Economic Indicators
In a sense, the CCI is a lagging indicator in response to several economic catalysts, among them the health of our jobs market, growth in wages, and the GDP. Confidence tends to fluctuate more strongly than actual economic data. As shown in Table F, after a kneejerk reaction 2007 to the bottom of the Recession in 2009, Consumer Confidence tended to mirror the growth in personal income and the rising value of goods and services with the CCI responding more sharply to economic downturns.
During the Great Recession, the number of employed U.S. workers peaked historically in 2007 at 138 million workers, but dipped 4.5 percent before bottoming out in 2010. Since then, the number of employed workers has risen by 14.4 percent – roughly 1.8 percent a year from 2010 to 2018, with growth continuing in the first quarter of this year to a total of 150 million employed workers in March.
Meanwhile personal income and the GDP fell only slightly during the recession but quickly gained momentum after 2009 – personal income increasing 46 percent and GDP by 42 percent.
Consumer Confidence and Goods and Services
Consumer Confidence is perhaps the prime external driver of consumer spending. Population and household formations form the base for growth in spending; however, Consumer Confidence drives demand, especially when it comes to durable goods. Table G shows the indexed growth of selected products. Note: Data for the first quarter of this year was not available at press time.
New Motor Vehicles follows a similar trajectory as Consumer Confidence with personal consumption dropping dramatically from 2007 to 2009 (down 29 percent) before growing by 71 percent from 2009 to 2018. Also taking a nose dive of 15.8 percent in 2009, consumption of Furniture and Home Furnishings items has since continued an unwavering climb – up 44 percent by 2018. Since 2017, however, spending on Furniture and Home Furnishings has not kept pace with the rising confidence levels. After peaking in 2008, the Video and Audio Equipment industry has declined and remained flat with a slight increase from 2015 to 2018 of 5.9 percent.
Consumer Confidence has a lesser impact on non-durable goods, which tend to avoid the peaks and valleys of confidence swings more so than durable goods. As shown in Table H, consumers may slow non-durable purchases like food and clothing, but only significantly during periods of extremely low confidence. Gasoline and other motor fuels tend to follow a different pattern based on price, availability, and seasonal changes in demand.
Similar to non-durable goods, consumer spending on services did not show massive declines in consumption during the recession despite the plummet in Consumer Confidence (Table I). Since 2009, consumer spending on healthcare, eating out, and foreign travel has skyrocketed. Healthcare spending has increased by 60.7 percent since 2007.
Spending on eating out and foreign travel both dipped slightly in 2009, but have since grown by 53.9 percent and 85.2 percent, respectively.
Consumer Confidence and Housing
The other piece of the consumer spending pie is housing, especially new home sales. Economic conditions drive the homebuilding industry and once building slows, it takes a while for housing starts to catch up once the consumer starts to regain confidence. As shown in Table J, Consumer Confidence has well exceeded new home sales and housing starts – surpassing both in 2013. Due to low inventory across the housing industry, consumer spending on new homes cannot keep with demand and the positive economic outlook. Indications in the first quarter of this year show stronger new home sales, but a disappointing period for housing starts. Meanwhile, existing home sales for the first two months of this year are still down 3.9 percent compared to last year even though February sales are 11.8 percent over the previous January.
Consumer Confidence and the Future
How high can Consumer Confidence go before a downturn in the economy? Ten years out from the last recession, many economists are predicting the next one. Figure 1 paints a daunting picture of the pattern of high Consumer Confidence followed by a recession. At an index of 140.1, 2000 was the most confident year on record before plummeting down to 78.6 by 2003. After climbing back up to 105 in 2006 and 2007, the U.S. experienced its least confident year on record with an index of 45.2 in 2009.
According to a February survey from the National Association for Business Economics, half of 280 business economists think a downturn in the economy will occur by the end of next year and 75 percent believe the U.S. will be in a recession by 2021.