MONEY & INVESTING

The frame of mind of the U.S. consumer is an important factor in gauging the level of consumption of goods and services by the American population.

Consumer spending accounts for approximately 70 percent of the gross domestic product of the United States. It is the sum total of all the expenditures made in the U.S. economy. This excludes cash transactions that are not reported or recorded.

Consumer levels have not always been at the 70 percent level. During World War II, consumer spending was as low as 50 percent of the U.S. GDP. Today’s consumption at 70 percent of GDP is the highest among all the developed countries. Consumer spending in the past 15 years has been largely fueled by abundance of credit, little self-restraint and the availability of cheap imports or declines in the cost of technological products that made purchases easier and easier to justify.

A lot of consumer spending is discretionary: spent on things which are not needed or that are not utilitarian in purpose. (This truism for Americans is not so for developing countries. There, spending is predominantly for items critically needed or core to daily living.)

SOURCE: THE CONFERENCE BOARD Possibly the best measure of consumer sentiment is the Consumer Confidence Index, which is issued monthly by The Conference Board, an independent economic research group. The Federal Reserve and all international central bankers as well as all businesses — domestic and international — closely watch this number. China, for example, values the U.S. consumer as the major buyer of its products. If the American consumer is not perky, it has ramifications for Chinese factory orders and export levels.

The CCI calculation is based on 5,000 responses to questions about the present and future economic expectations. It takes into account business conditions now versus the next six months, employment conditions now versus the next six months, and total family income for the next six months. It permits the “average Joe” to differentiate between feelings about the current economy from the future. These answers form a composite, the CCI itself, and time-dimensioned categories.

Let’s see what the index said recently. The February CCI was reported to be 46.0, down from 56.5 in January. The Present Situation Index decreased to 19.4 from 25.2. The Expectations Index declined to 63.8 from 77.3 last month. (A change of 5 percent or more is considered to be statistically important; not just static in the data.) Even more importantly, you can drive a truck through the difference between people’s feelings about the present situation and their expectations. Consumers really expect economic improvement even though the peak in federal bailout money has been spent.

Lynn Franco, director of the Conference Board Consumer Research Center said: “Consumer Confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years (February 1983, 17.5). Consumers’ shortterm outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business.

The all-time peak in the CCI was in 2000, which coincided with the dot-com bubble. Since then, the interim peak was in 2007— also a peak in the U.S. stock market.

Another look at consumer confidence comes from the University of Michigan index. The MCSI has many similarities to the CCI but it focuses on consumers’ general perception of their financial condition. The statistical base is frequently smaller (with a minimum of 50 phone calls). Interestingly, their take on the economy in February is not so dreary. While there was a downtick in their February report but not anywhere as dramatic as the CCI index.

You might be surprised that the consumer sentiment indices are weaker even though GDP for the fourth quarter of 2009 was strong: 6.3 percent nominal and 5.9 percent inflation adjusted. The problem for the consumer is that he is not feeling the recovery in terms of income growth, personal financial condition, or availability of jobs and job security. The past month saw new home sales drop to record lows; home prices fall again; housing inventory (in terms of months of supply) rise again and bank lending fall in the sharpest decline since 1942.

The Federal Reserve, which sets monetary policy, has to read the economic tea leaves of this major downturn. With consumption representing 70 percent of the economic pie, there will be no real recovery until the consumer feels it. 

— Jeannette Rohn Showalter is a Southwest Florida-based chartered financial analyst, considered to be the highest designation for investment professionals. She can be reached at jshowaltercfa@ yahoo.com.