Consumer confidence has taken a nosedive.
The University of Michigan’s Consumer Sentiment Index plunged from 103.8 in January to 94.4 in February.
Its Current Conditions Index, which measures the way consumers feel about the present state of the economy, dropped from 109.5 to 103.
And its Expectations Index, an indication of hopes for the near future, fell out of bed – from 100.1 to 88.5.
The Conference Board confirms: Its index of consumer confidence dropped from 96.4 to 87.3 – the lowest reading since last October.
Do not underestimate how important this is.
About 70% of our total economy is consumer spending. Any downturn, even a modest one, has the potential to send nearly everything else into a tailspin – sales, earnings, stocks.
Yet, strangely, no one on Wall Street seems to be paying much attention. They think it’s just a hiccup. They assume consumers will bounce back soon.
Will they?
Gain an understanding of WHY consumer confidence in America is so fragile, and you should be able to answer that question yourself …
MERCEDES MADNESS
This weekend, before I sat down to write to you, I called an old friend, Tony Sagami.
I’m 57 now. And at my age, it’s rare to meet people who become friends for life. Tony, a leading financial expert, is one of them.
He lives in an affluent part of Austin, an area that lies within the bucolic, rolling hills of the Texas Hill Country, bordering Lake Travis. And some of his recent experiences there provide a unique perspective on the affluent consumer in America.
“I feel as out of place in this town as Jed Clampett in the Beverly Hillbillies,” he said. “We’ve got five golf courses … million-dollar homes … Porsches, BMWs, Escalades, Hummers, Mercedes, and Jaguars everywhere … even our own airport with the six-figure airplanes for weekend recreational pilots.
“But I’m different. I drive a 1998 Toyota Corolla, and my wife drives a 2000 GMC mini-van. Our children attend public school, and we shop for their clothes at Target or Wal-Mart. I don’t golf, and we’re not members of the country club.
“Don’t get me wrong. I own three successful businesses, and I’m one of the luckiest people on earth. I have a beautiful, wonderful wife and four healthy, intelligent, athletic, and considerate children. It doesn’t get much better than that.
“The big difference between me and the others in this town is that I’m old fashioned and don’t believe in debt; they’re modern and borrow like mad.
“My local banker puts it this way: `People in this town may LOOK rich, but most of them are in debt up to their eyeballs – jumbo mortgages, two car payments, mountains of credit card debt. Many have borrowed so much, their net worth is way below zero! Believe me. I know. I see all their financial statements and credit reports when they apply for a loan.’”
Tony paused to think for a moment. Then he shared another recent experience. “Last week, as I pulled up to my local Exxon station, a tow truck pulled out with a nearly brand-new, shiny Mercedes. I assumed it’s because the gas station doesn’t service Mercedes. But I assumed wrong. The owner of the station tells me the car isn’t broken – it’s being repossessed.
“Then he told me that after the tow truck carts away the first Mercedes, it’s going to make another trip to pick up ANOTHER Mercedes from the SAME family. And, this kind of thing is a regular routine – maybe twice a week.
“The dire reality: The wealth you see in communities like mine is financial smoke and mirrors. As we say in Texas, all hat and no cattle.”
Indeed, Texans have some of the lowest credit scores in the nation. But they’re certainly not alone in their debt woes:
* Total mortgage debt from Americans hit $6.2 trillion at the end of 2003, an amazing $2 trillion increase in just the last two years.
* Non-mortgage consumer debt – mainly auto loans and credit card debt – has grown to a record $2 trillion, which works out to a staggering $18,700 per household.
* All this debt is affecting American balance sheets. The net worth of U.S. households fell to $39 trillion in 2003 from $41 trillion the year before.
* According to the American Bankers Association, credit card delinquencies reached a record 4.09% in November. Bankruptcy filings have ballooned to a record 1.6 million – a 125% increase since 1989.
* At least 30% of auto loans are now stretched out to 72 months. Banks are even issuing 96-month auto loans.
Strangely, Wall Street analysts don’t seem to think this debt mess is cause for concern. But they’re not the ones who have to make the payments.
Each and every month, average American families are in a race to see whether they run out of money or run out of days. It’s no wonder confidence can drop so suddenly.
NO SAVINGS
Ironically, Americans are doing precisely what the government has prodded them to do: They’re spending almost every last penny of their take-home pay.
Indeed, that’s the CRITICAL difference between earlier recessions in this country and the most recent recession, in 2001.
Back in 1975, during one of the deepest post World War II declines, Americans saved as much as 14.6 cents for every dollar in disposable income.
And when the economy sagged in the early 1980s, they saved as much as 12.5 cents on the dollar.
Even as recently as the early 1990s recession, American saved at least 7 cents per dollar.
When they save that much, they spend less and it slows things down for a while. But it also builds for the future, helping to sustain the economy – not just for a few months, but for several years.
This time around, though, it’s different – VERY different.
In 2001, the most Americans put away was 3.3 cents per dollar, and that was right after 9/11. And throughout the recession, which began in March of that year, the U.S. savings rate averaged only 1.66 cents on the dollar.
How much are Americans saving right now? Barely more than a penny, near the lowest in history and drastically lower than the savings rates of most modern nations.
No wonder American consumers can lose confidence so quickly! They have virtually no comfort cushion to fall back on.
DISCOURAGED WORKERS
A couple of years ago, a project manager at Fidelity Investments lost his job after nine years of earning a six-figure salary.
Then he exhausted his unemployment benefits, despite a hefty mortgage for his four-bedroom home.
Like Tony’s neighbors in Austin, the consequences of this kind of joblessness are devastating. But despite the huge impact he and others like him can have on the economy, he wasn’t even counted among the unemployed.
Instead, he fell under the less-publicized, largely unknown, Labor Department category of “discouraged workers” – those who haven’t looked for work in at least a month.
Now get this: If you include the TOTAL number of discouraged workers in America … PLUS a similar category that the government calls “marginally attached” workers … PLUS part-time workers who would prefer full-time work, then …
The unemployment rate in America is not 5.6%.
It’s not even 7% or 8%.
After adjusting for seasonal changes, it’s actually 9.9%.
And without the seasonal adjustments, it’s a whopping 10.9%!
In December 2003 alone, the government dropped 309,000 Americans from the labor force, no longer counting them as unemployed because they stopped looking for work.
And all this is happening DESPITE the fact that the economy recovered sharply in the second half of last year … despite the biggest tax cuts in recent memory … and despite the lowest interest rates in 45 years.
Imagine what might happen if the recovery falters … or if interest rates rise … or both.
In a recent Reuters interview, Wells Fargo chief economist Sung Won Sohn explained it this way:
“Despite all the hoopla, neither businesses nor potential employees have confidence in the economy. They’re not believing all the stories about a strong and healthy economy given by the economists and the government … Economic growth is great, but the job market is lousy.”
Where are the discouraged workers coming from?
Many are running from the nation’s factories, which have cut 2.8 million jobs in 41 straight months since the industry peaked in July 2000.
Sohn explains: “People who lost jobs in manufacturing, especially some of the older workers, they look at the landscape and say, `Why should I waste my time?’ And they simply drop out of the labor force.”
HUGE MISSES
So now you have them – three, long-term, fundamental and deeply-entrenched reasons why consumer confidence is so fragile:
Huge consumer debts.
Virtually none saving money.
One out of ten eligible Americans out of work.
Here’s another reason: Many Americans are losing faith in the government’s numbers, and I can’t blame them. According to the Washington Post …
* Two years ago, the government predicted a budget deficit for fiscal 2004 of only $14 billion. Now, the estimate is a deficit of $521 billion, THIRTY-SEVEN times worse than their earlier rosy estimates.
* Also two years ago, the government forecast that there would be 3.4 million more jobs in 2003 than there were in 2000. Instead, the economy lost 1.7 million jobs – the largest gap in job forecasts in at least 15 years.
* Just last year, the government upped the ante, claiming the economy would add 2.6 million jobs this year alone. But in the last two months, they’ve been adding jobs at the annual rate of less one-third that pace.
And most recently, the administration has backed off from its job forecast, a tacit admission that it’s overstated.
Problem: When there are fewer jobs, there’s less income for Americans, less revenues for the government, and a much bigger deficit.
But no one has bothered to revise the administration’s deficit estimate, which still stands at $521 billion. I wonder why.
Robert D. Reischauer, former director of the Congressional Budget Office, calls the rosy estimates “a little exuberant.”
Lee Price, research director for the Economic Policy Institute, says they’re “outlandish.”
I have another word for them: DANGEROUS.
Why? Because whenever there’s a big disconnect between what the government SAYS is happening and what people experience on the ground, it sets the entire nation up for shocking disappointments … and ANOTHER plunge in consumer confidence.
A FAKE RECOVERY
Here’s the bottom line:
Back in the old days, American economic recoveries were for real.
Americans worked harder, earned more money, saved more for a rainy day, and spent most of the rest wisely.
No more!
Today, most Americans are saving next to nothing. They’re borrowing and spending like banshees. And it’s finally beginning to dawn on some people that all this could lead to some serious trouble.
Talk to your friends … chat with merchants … watch the news … and you can’t help but see the blatant signs of the borrow-and-spend epidemic that has swept across the American landscape.
Then ask yourself: Is this a true recovery in the American economy? Or is it a set-up for another dump?
Even if you’re not sure, your doubt alone should be sufficient cause for caution.
Whatever you do, don’t follow the crowd. Build cash reserves. Stay safe.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
P.S. Don’t assume that a Gore administration would have done any better.
P.P.S. Another decline in the economy in the years ahead, no matter how severe, will not be the end of the world. We’ve been through worse before, and we survived, even thrived. We’ll do the same again.
