Tuesday, August 30, 2011

Spending Confounds, Confidence Plummets

Yesterday brought the latest income and spending report from the Bureau of Economic Analysis. With spending still driving the U.S. economy, and arguably world growth, we watch these numbers closely. I’ve been increasingly bearish on the economy recently, but I have to admit that the print was surprisingly good, even when stripping out the effects of inflation and energy prices. As always, one data point isn’t enough to change an investment call, and in my mind we’ll need to see a few more positive data points to confirm that the number was anything but noise. However, it was nice to see a positive piece of data within the current sea of negativity, and if consumer spending continues to improve, I think it will be meaningful for the economy in a positive way.

Today brought the August report on consumer confidence, and it was a miserable number. This made a lot more sense to me given high levels of unemployment, the latest stock market swoon’s impact on net worth, recent regional surveys that have been melting, and a fleeting faith in policy makers around the globe. To be honest, we’ve never given a lot of weight to confidence as a leading indicator for the stock market, as it is often coincident at best and lagging at worst. But currently we appear to be in the midst of a crisis of confidence not seen since 2008, and common sense tells me that confidence can affect prospective decisions regarding hiring, capital spending, and even whether I decide to make a meaningful purchase in the near future. So having confidence does matter.

Two days and two data points that paint very different pictures about the world we live in. I am hopeful that the spending number can propel the economy going forward and help us avoid economic contraction. But hope is not a strategy, and we will stay defensive until more positive evidence materializes.