July 16, 2011
Consumers get more worried
Reuters reported yesterday that the preliminary July reading for the Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.8, the lowest level in more than two years. In fact, that's about as low as this measure ever got in the recessions of 1981-82 or 1990-91, and is well below values for the recession of 2001.
Here's an update of a graph I last looked at in January, plotting consumer sentiment over the last 10 years along with real gasoline prices, with the latter shown on a negative scale to make the negative relation between gasoline prices and consumer sentiment more apparent. Consumer sentiment had been holding up reasonably well despite the high gasoline prices of 2011. That is, it was until yesterday's report.
While I'm at it, here's an update of another graph I often look at, which shows consumer spending on energy goods and services as a percentage of total personal consumption expenditures. The blue line here is drawn at 6%, above which we usually see a consumer response. We've been above that threshold for each of the last 3 months.
Yesterday's consumer sentiment report is preliminary, and even the revised value for this series is not a terribly reliable predictor of economic activity. But this is the second "oh no!" report in the last two weeks, following the dreadful employment numbers released last week.
The recent batch of bad economic news led Goldman Sachs to lower their forecast for real GDP growth for Q2 from 2% to 1.5%, and for Q3 from 3.25% to 2.5%.
And I'm not going to argue with that.
Posted by James Hamilton at July 16, 2011 12:25 PMdigg this | reddit
I blame the debt ceiling.
Posted by: aaron at July 16, 2011 02:03 PM
I will not be suprised if we come close to touching 0% growth one quarter this year, though we might not know it until well into next year.
Posted by: aaron at July 16, 2011 02:07 PM
But JDH, don't you know that the problem isn't weak demand and consumers holding back as they repair balance sheets? The problem is that the Obama Administration just doesn't inspire confidence in the "job creators" out there. If only Obama and the Democrats hadn't passed healthcare reform businesses would be falling all over themselves to expand capacity and increase hiring. If only we cut govt spending by $4T and passed a balanced budget amendment, then businesses would see that we were serious about lowering today's high interest rates that are crowding out investment. If only the Fed quit trying to print trillions of dollars businesses wouldn't be confronted with the kind of Zimbabwe-like inflation that is all around us. Snark, snark.
I take it that you didn't get your this week's points from the RNC & Freedomworks. ;-)
Posted by: 2slugbaits at July 16, 2011 04:08 PM
Among the consensus views is that US "consumers" are anxious and uncertain because of the brinksmanship occurring in DC regarding the debt ceiling (de facto default threshold). While this is largely a procedural issue and one that is exacerbated by selection-year posturing, the more serious issue is that the US is on course for gross public debt/GDP of 200%, interest on the debt at 25% of receipts, and at least partial insolvency (interest moratorium, suspension of refunding for trust funds, etc.) by no later than '15-'18.
Also, professor, if one examines real energy expenditures as a share of the bottom 80-90% of US households' total real disposable income after debt service, one will see that we are at the highest level on record going back to the late 1940s.
That the bottom 90% constitutes about half of US income and spending, and given the share of spending as a share of GDP, the larger net effect is contraction for real private per capita GDP with the nominal price of oil above $60 and effectively no growth with the price of oil above $40.
Further, without the US gov't having borrowed and spent 50% of private GDP since '08, the US economy would have contracted 25-30% over 3 years, which is approximately the scale of contraction of the Great Depression in 1929-33 as well as the cumulative loss of real GDP growth in Japan during 1990-2000 from the avg. trend rate of growth that otherwise would have occurred from 1989 to 2000.
Moreover, in Japan since 1989-90, the country's slow-motion debt-deflationary depression has resulted in the cumulative loss of real GDP growth of 47-48% from the growth that would have otherwise occurred had the trend rate to 1989-90 continued. The US faces a similar cumulative loss of avg. trend real GDP since '00 by 2020 of 40% or more, implying a real per capita loss of 50% or more.
Consequently, over the next 10-20+ years, the US faces the inescapable mathematical and demographic reality of a 50% or larger cut in real per capita standard of material consumption (and associated economic activity) and gov't spending, including local and state gov't spending, primarily in the form of wages/salaries, pension payouts and benefits.
Needless to say, no politician, CEO, economist, Wall St. shill, or mass-media influential can tell us the truth about our predicament; if they did, imagine what "consumer CON-fidence" would look like then.
Posted by: Bruce at July 16, 2011 04:40 PM
If gasoline prices are so important to economic growth, isn't there anything we can do about it, if not in the short term in the long term?
There are two major sources of energy that this country has in such abunance that it currently exports or will export them as soon as the proper terminals are built.
Coal comes in different grades. The hrown coal (lignite) that is too wet for serious power production and the high sulfur varieties that are expensive to burn are both fine for making into motor fuel. Coal is widely distributed. Coal to fuel plants cost a lot of money to build but can clearly pay back investors. We are building coal to fuel plants in the Appalachians and Wyoming. It would be feasible for the US to become a fuel exporter with coal fuel since we have more coal than any other country. The key to motor fuel prices is supply, supply, supply. If we were to increase the total supply of motor fuel, it would drive down prices. Certainly it would be good for the balance of payments.
Natural gas is in such great abundance in this country that it has broken with its traditional price ratio with oil. It has an excellent distribution network throughout the country. A fill up of natural gas costs 1/2 as much per mile driven as gasoline. Its major problem is that the gas tank takes up half the trunk space of a sedan. However considering the average household has multiple cars it would not be an unreasonable solution for commuting and city driving.
Celanese has come up with a process that converts natural gas or coal to ethanol. This would break the vicious cycle between food prices and ethanol. Celanese claims its process produces ethanol for $1.50 per gallon, which is the equivalent of crude oil selling at $60 a barrel.
Cars can run on pure ethanol. Ethanol mileage is 70% that of gasoline so the real cost is equivalent to gasoline at $2.14 wholesale per gasoline.
China has built coal to fuel plants that are merrily churning out fuel, and Celanese is focusing on the Chinese market. China is the world's largest producer of coal and also has vast natural gas deposits. We have more coal reserves including huge lignite deposits, than any country and natural gas production is so strong of late that we are running out of storage capacity. Therefore we have the solution to lowering the cost of driving in hand.
Government tends to focus on the short term, doing things such as releasing the strategic oil reserve. When it does focus on the long term it tends to make mistakes such as the corn ethanol boondoggle or funding for cellulosic ethanol, which has been riddled with massive criminal fraud.
Neither of these solutions require government subsidies or mandates to be profitable, as is the case with every other alternative to oil. They do carry considerable regulatory risk, so government can encourage them with a strong regulatory thumbs up.
Posted by: colonelmoore at July 16, 2011 09:29 PM
The EU harmonised consumer confidence indicator is based on answers to the following four questions with five answer alternatives to each question (a lot better, a little better, the same, a little worse, a lot worse).
(1) Expected change in financial situation of household over the next 12 months;
(2) Expected change in general economic situation over next 12 months;
(3) Expected change in unemployment over the next 12 months;
(4) Expected change in savings of household over next 12 months.
"The index, produced by Langer Research Associates in New York, is derived from telephone interviews with a random sample of about 250 consumers a week aged 18 or over, and is based on a four-week moving average of 1,000 responses. The percentage of households with negative views on the economy, personal finances and buying climate is subtracted from the share with positive outlooks and the difference is divided by 3. The results can range from 100, indicating every participant in the survey had a positive response to all three components, to minus 100, signaling all views were negative. The margin of error is plus or minus 3 percentage points."
Consumer confidence in the U.S. rose last week as households became more upbeat about the state of their finances and optimism climbed among wealthier Americans.
Next update jul 21st.
Posted by: ppcm at July 17, 2011 03:23 AM
How would one chart capital controls? It is directly related to the energy topic but hard to quantitate. My subjective impression is one of dramatically increased difficulty in opening say, a Canadian bank account. Do restrictions vary between oil importing/exporting countries? One sign of the beginning of the end.
Posted by: Bogwood at July 17, 2011 04:31 AM
The GDP has been holding up because of "stimulus" dollars sent to the states to prevent layoffs is running out and the FED has taken a breath on monetary injections. That means that the "G" component of the formula is beginning to slip and can no longer veil the huge decline in the private sector. Governments are running out of money all across the country and so the "G" component is going to continue to decline.
Oil prices will begin to climb again because the dollar is crashing, oil is priced in dollars. It will appear to many that higher oil prices are driving down the economy but in truth a declining dollar makes it harder for afford imports with the value of savings being sucked away. Inflation is low so government welfare payments are static. That means that government welfare is actually also declining in real terms while increasing as a percentage of the budget.
There are so many problems causing decline that picking only one is virtually meaningless.
Posted by: Ricardo at July 17, 2011 08:18 AM
Ricardo, quite correct.
Colonel, see above. The critical factor is net energy or EROEI, which is declining in real per capita terms and set to decelerate markedly hereafter.
IOW, we are about to experience an unprecedented scale of diminishing returns to increasing complexity in net energy terms, which in turn will reduce real returns to assets and investment, preventing real per capita growth of investment and output (and gov't receipts) hereafter.
Consequently, we will not be able to afford (in terms of real per capita net energy, ROI, and ROA) to build out to scale anything close to what is now anticipated for so-called "alternative energy", i.e., wind, solar, geothermal, etc., AND maintain indefinitely the existing liquid fossil fuel infrastructure.
ppcm, above are links to the history of the CCI, the Gallup ECI, and the Conference Board's consumer and CEO surveys, which remain weak and at or near recession-like levels.
Posted by: Bruce at July 17, 2011 11:13 AM
EROI and "austerity" (the actual "new normal"):
". . . Though not a single politician or mainstream economic analyst has ever made the connection, the new worldwide austerity in public spending traces to a physical cause, as measured by change in EROI — energy return on energy invested. This is the ratio between the energy that comes into the global economy and the energy it takes to produce that energy. Worldwide, the average EROI of oil is down to 20:1 from its original value of 100:1 eighty years ago. This means that our oil-fueled economy simply has less capacity to generate wealth than it did back then, because an increasing share of the energy that used to be dedicated to producing goods and services is being plowed back into securing energy.
Even more troubling than oil’s 20:1 global average is the figure for new oil, just 5 to 1. It takes a lot of energy to drill five miles under the ocean and pump crude back to a refinery, or to cook tar sands to extract a usable fuel. The energy wellspring at the heart of our economy no longer gushes a torrent of wealth; it’s a smaller, much-diminished stream."
Posted by: Bruce at July 18, 2011 06:56 AM
The graph shows that Obama is our new Carter. The question is where is our new Reagan to turn things around?
Posted by: ObamaGolfJones at July 18, 2011 07:34 AM
Real average monthly wages have fallen in seven of the last eight months.
Basically, wages are growing at under 2% while inflation is over 3%. The core CPI is about 1.5% so the difference of food and energy is causing real incomes to fall. Sith real income growth sharply negative why should anyone be surprised with weak consumer spending.
Posted by: spencer at July 18, 2011 07:59 AM
According to Calculated Risk, this is a coincidental indicator - ie it reports what is happening now as opposed to predicting future direction. Is this correct? If so than it would appear that the debt ceiling debate is taking a toll on the economy?
An aside, I am working on the relationship of presidential approval and economic indicators. The link below will take you to a spreadhseet with Gas Prices, Unemployment and Presidential Approval for every month since 1977. Does the FED have the consumer confidence numbers in spreadsheet form?
Posted by: fladem at July 18, 2011 08:01 AM
fladem, copy and past data as text into a spreadsheet and format data with fixed columns:
Spencer, the situation is even worse for the bottom 80-90% of US households in terms of real DPI after debt service/DPI and energy/DPI.
WRT Obummer being Carter II, perhaps another treasonous Vietnam-like scheme or October Surprise II is needed to ensure a Republican victory. But who in his right mind would want to be POTUS in '13-'17?
Posted by: Bruce at July 18, 2011 10:07 AM
This is excellent news! For Perry!
Posted by: irobot at July 18, 2011 10:32 AM
McBride as an interesting piece on govt revenues as a share of gdp over time. Personally, I'd be interested in an analysis of revenue by source, what has changed, what is structural, what is cyclical, etc. For example, tax receipts from corporations are less than half of what they were half a century ago, but US corp tax rates are among the highest in the OECD. Why the seeming paradox?
Posted by: Steven Kopits at July 18, 2011 11:09 AM
Mich sentiment is a useable lead indicator. Its a fine minor addition to consumption forecasts, the big driver being income.
At global insight 10 yrs ago we used the expectations part of Mich sentiment in the big model
It's Conference Board sentiment in the reported leading indicator, produced now by, wait for it, the Conference board, but i believe Mich was used when the govt did the leading indicator
Posted by: AWH at July 18, 2011 12:05 PM
Paul Ryan provides a helpful timeline of the Obama Democrats' fiscal history
Time is running out.
Posted by: Rich Berger at July 18, 2011 12:21 PM
The debt ceiling comment was sarcasm.
Seriously, we seem to be on the verge of going full retard.
I blame global warming.
Posted by: aaron at July 18, 2011 01:00 PM
Real average monthly wages have fallen in seven of the last eight months.
Basically, wages are growing at under 2% while inflation is over 3%. The core CPI is about 1.5% so the difference of food and energy is causing real incomes to fall.
I am reading Ludwig Erhard's book Prosperity Through Competition, a book you might be interested in. In his book he talks of resistance he encountered because prices were falling in post WWII Germany. He pointed out that his free market policies gave rising real wages while prices of all goods and services were falling. Only in recent years with the the horror stories about deflation in a Keynesian framework has there been a fear of falling prices. In years past falling prices signaled prosperity. How time changes things. Today if there is not at least a 2% inflation our over-educated monetary authorities began to sweat and fret and pump cash.
Posted by: Anonymous at July 18, 2011 01:35 PM
" . . . Today if there is not at least a 2% inflation our over-educated monetary authorities began to sweat and fret and pump cash."
Anon, in a fiat debt-money system, debt-money growth and associated price inflation must rise at least the rate to service the growing debt; if it doesn't, debt-money deflation occurs, which is what we have seen since '08.
In fact, real per capita debt-money deflation (bank loans less gov't dissavings) to real private per capita GDP has averaged 6-7%/yr. since '08.
Increasing private debt-money and gov't dissavings can no longer result in an increase in real per capita private GDP growth.
Once outright gov't spending cuts kick in at all levels and private health care spending slows to a crawl or contracts, we will see outright consumer price deflation occur and persist (and the money multiplier and M2 velocity collapse further), at least in terms of reported core prices.
Posted by: Bruce at July 18, 2011 02:33 PM
Bruce - thank you.
AWH - I am trying to find economic indicators that are useful in predicting political approval. Most of the models haven been blown to bits by Obama's approval - which is far higher than most models would predict.
Posted by: fladem at July 19, 2011 07:17 AM
Wow, it is great being a supply sider. The good news just keeps on coming.
So tell me, which way do you want Wisconsin to go?
Posted by: Ricardo at July 19, 2011 08:43 PM
The problem is that the Obama Administration just doesn't inspire confidence in the "job creators" out there.Pretty much so.
No business confidence = no business growth or hiring = flat demand and little job creation = poor consumer confidence.
Prominent democrats agree.
I'm saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime.
And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right.
Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration.
And it makes you slow down and not invest your money.
Posted by: Duracomm at July 20, 2011 04:56 AM
Wynn's core customer needs to place at risk about $25,000 per visit. In return, the customer will experience some if not all of those things Wynn is famous for in the industry. The psychology behind this is pretty intense stuff but bottom line you need the fiction of "found money" - plus a(n) (un)reasonable expectation that you will "find" a similar amount of money in the near future should you lose this bit - in order to sit down at a $50 blackjack table. Those chandeliers don't pay for themselves.
Bubbles are great for the casino industry. When they pop it takes a lot of wind out of their sails. If you start worrying too much about where your next $25,000 is coming from you will probably cancel your trip. It makes sense he would talk about confidence in this way but consider the source.
Posted by: irobot at July 20, 2011 07:32 AM
While some have blamed high energy prices, the price of gas has been well below gas while Carter was president and that failed presidency created 10 million jobs in 4 years; the even high prices the next 4 years when Reagan was president resulted in 7 million jobs, and the next 4 years with prices falling, but still higher produced 10 million.
But the low price of gasoline didn't keep the real estate bubble in the 80s going so it collapsed and was a drag on jobs while HW Bush was president,3 million.
Really low gas prices in the 90s didn't result in much higher job growth rates than the 70s.
And the terrible job growth since 2001 when gas prices have averaged less than the 70s and 80s shows low gas prices isn't a job creator.
But as someone who was a hippie boomer young adult worker in the 70s, the oil shock brought both private and public sector policies that drove REAL investment, not the pump and dump fake investment in real estate bubbles of the 80s and 00s.
And that points to the real need today, INVESTMENT not more consumption. Consumption funded by debt is stupid, but investment productive capital funded by debt is pretty pure capitalism as long as the added productivity is shared with those providing the capital.
In the US, the electric grid is under invested in and causing grid lock - right now the Northwest has too much electric power capacity and the grid operators are in a battle between the suppliers over who gets to use the grid, and who is blocked from the market. Other places small suppliers can't get permits to invest and produce electricity because the grid can't handle their power because others got there first.
Our highways and rails are congested in a number of major interconnection points and have been for a decade, but if jobs are going to be created and population allowed to grow, the congestion will only get worse and expand to more places. What is needed is massive investment in transport to allow economic growth in the Us that is competitive with the world.
Government plays a role in setting fees on electric power to fund added grid capacity, gas taxes need to be hiked or replaced with a toll system to pay for highway investment, cost sharing on upgrading the intersections of rail and roads to speed both road and rail traffic.
The consumer does not have the security to spend and borrowing to consume is idiotic, but the need to invest is desperate, and investment is legitimately paid for with debt, as long as taxes, fees, assessments are put in place to service the debt based on the benefits gained by users of the capital.
Posted by: mulp at July 23, 2011 09:41 PM