We all know that the one thing that U.S. consumers do not lack is confidence. Despite falling real wages, and mountains of debt, they just keep on borrowing and spending. If anything, American consumers have too much confidence. What they need is a little restraint, a little less self indulgence and a little more prudence. Yet yesterday, Wall Street celebrated the unexpected serge in consumer confidence, with July’s index rising to a two year high. This is supposedly good news because it reveals a willingness on the part of already overly-indebted American consumers to venture further down the path to insolvency.
Of all the key economic indicators, the consumer confidence report is, in reality, the most useless (unless it is viewed as a contrarian indicator). Extreme optimism often indicates market tops, while excess pessimism often occurs at bottoms. Consumer confidence figures are simply the main attraction in the style over substance nature of the current economic “recovery.” After all, in the current environment, the only positive news is rhetorical, such as the unsubstantiated, or outright false, optimistic assurances from Alan Greenspan, the misplaced confidence of American consumers, or their willingness to over-pay for homes. On the other hand all the substantive data, such as today’s weaker than expected durables goods report, or twenty one year highs in crude oil prices, the failure of the labor market to regain its strength, the renewed serge in bond yields, or the prospects for a fifth consecutive weekly decline in the stock market, continue to point toward recession.
In truth, consumers are too brainwashed, and their judgments too clouded by open spigots of seemingly free money, to have the good senses to be pessimistic. Their houses have appreciated in value to an extent that their parents could never have imagined, they have almost limitless access to cheap and easy credit, and they can buy almost any imported product their hearts desire at prices that are kept abnormally low by the massive dollar intervention conducted by Asian central banks. In addition they are continuously reminded by the Washington and Wall Street propaganda machines that their reckless behavior is actually economically courageous, and even patriotic. However, sometimes not only is pessimism warranted, it is often necessary. A little pessimism is what causes people to put something aside for a rainy day, assuring that when that day comes, its effects can be mitigated. I suppose it’s alright to have a nation full of people who never save anything for a rainy day, just s long as it never rains. Unfortunately, America is about to be hit by a monsoon.
For a more in-depth analysis of the flaws of consumer confidence, and the fallacies of consumption driven economic growth, see my previous comments of April 16, 2004, Oct 31, 2003, Jan 8, 2003, Nov. 27, 2002, and Nov 15, 2002, in the archives.