Dour News Round-Up

Following last week’s report on economic growth at the end of last year, we have begun to watch for signs as to whether the uptick to a near 3% rate will continue. Probably not.

The first sign of a slide backwards is the news that consumer confidence has slipped in January. The Conference Board’s index of confidence now stands at 61.1%, down from December’s 64.8%. While the decline is not very significant it brings to an end a run of improvement. More importantly, perhaps, is the news that the main cause for the drop was a reversal in expectations. The index includes measures of opinions about current activity as well as expected activity. Given the stagnation we find ourselves in it is no surprise to find there has been a wide difference between the two views. People are very downcast about the current situation, but generally relatively upbeat about the future. January’s decline in the overall index was driven by a slide in optimism on both levels: the number of people saying that current conditions are bad rose from 33.5% to 38.7%; while there was a slight decline in the number of people saying they expected things to improve. The outlook for an increase in incomes – or the lack thereof – seems to be the main driver of pessimism.

If this decline in confidence carries over four a month or two, we can expect the upturn in consumption we saw at the end of 2011 to level off. Since, as you all know, consumption is the main driver of the US economy, this would kick away one of the main props of growth, leaving us exposed to a period of more modest growth and heightened risk.

Likewise the news that home prices continue to decline is hardly a positive sign. The latest Case-Shiller index report, with prices up through last November, was released today. The news was not good. Prices of homes fell a further 1.3%, bringing the year on year decline to 3.7%. The index now stands 32.9% below its 2006 peak. The define was consistent across the country, only one major city – Phoenix – saw a gain on the month, and only Detroit and Washington DC saw gains over the year. On the downside, Atlanta saw the worst annual decline, at 11.8%, while several cities, including Tampa, Las Vegas, and Seattle, all hit new low points. Lower prices have, not unnaturally, produced a slight increase in sales. Our problem continues to be that real estate, which was major driver of employment during the 2000’s, remains highly depressed. Even after the recent uptick is sales, which has been spread over several months in a row, sales are at near all time lows. Consumers have not yet shaken off the full impact of the rapid loss of wealth implied by the fall in prices, and as long as the decline continues we cannot expect people to feel positively about their prospects.

Add in the protracted loss of traction for wages, despite the slight upturn in incomes in December, and it is no surprise that the mood remains dour.

What do we make of this?

Not a great deal: nothing significant has changed. The signs are that the economy is still growing, but that all the reasons for growth to be slow remain in place. Consumers are still beset by a poor outlook for wages, weak home prices, and an employment market only improving very slowly. This is scarcely the stuff to spawn a boom. Indeed it looks more likely that it will cause a slowdown. So my projection for GDP stays the same: look for growth around 2.0%, sometimes above by a little bit, sometimes below. Stagnation continues.