(DE) U.S. Markets Weekly – July 11 – July 15, 2011

Posted July 15, 2011 by CLeahey

[private][private]MARKET DATA ND THE OUTLOOK

Reuters/University of Michigan data released this week showed that consumers are currently at their gloomiest since early-2009 during the depths of the crisis. Does this latest reading on sentiment signal a collapse in consumer spending that would drive us back into recession? This is perhaps a drastic conclusion, but if this weakness in sentiment persists, it could be a risk to the outlook. The index fell about 8 points to 63.8 in early-July, essentially a recessionary reading. The factors weighing on sentiment are tremendous, and keep piling up – weak jobs and income growth, severe unemployment, high oil prices, Washington’s inability to agree on raising the debt ceiling or deal with the long-term fiscal outlook, likelihood of tax increases and entitlement cuts down the road, and Eurozone debt fears. You have to wonder how much more the U.S. consumer can take. Looking back to the 1970s, when the U of M index fell to the low-60s, the economy was in recession. This was the case in 1980, 1991, and 2008/09. Today, the economy is in weak recovery/expansion. Sentiment readings at this level are associated with negative consumption growth, but consumption growth was typically on the way down to begin with. Whether this degree of pessimism will lead to a retrenchment in spending is unclear. Meanwhile, spending growth has become unmoored from sentiment since the beginning of 2010. If consumers are feeling pessimistic, they aren’t exactly cutting back on spending, though it is probably restraining them. After hitting +3%, spending growth has decelerated more recently and has never reached the 4-6% range typical during business cycle expansions. So the latest U of M numbers perhaps raise more questions than they answer. Certainly a debt-ceiling agreement sometime this month could help improve consumers’ moods in August. But the list of risk factors will remain long for a while.

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