The Business/Consumer Confidence Split
Businesses are from Venus, consumers are from Mars. Matthew Zeitlin explores the split
For much of the past three years, companies have been thriving while consumers have been suffering. Today, however, the confidence shoe is on the other foot. Businesses think the sky is falling, while individuals have a bounce in their step.
The Financial Times’ noted that the third quarter of 2012 would be “the first since 2009 in which the profits of corporate America are forecast to turn negative compared with the same quarter a year ago.” The IMF ratcheted down its estimate for global growth this week. With emerging markets like China, India, and Brazil slowing, a moribund Europe, and plodding U.S., global trade will rise a measly 3.2 percent in 2012, compared with 5.8 percent in 2011.
Companies that depend on global growth are suddenly looking anemic. FedEx announced a major cost-cutting initiative on Wednesday in response to what CEO Fred Smith described as “slow economic growth.” Alcoa, the aluminum giant that does business all over the world, was, as always, the first Dow Jones Index company to announce its earnings this week. It reported a net loss of $143 million(PDF) for the third quarter. In a conference call, Alcoa CEO Klaus Kleinfeld said that the company anticipated a “slight slowdown in some regions in end-markets, and the main driver for this is China.”
This gloomy attitude is reflected in surveys and indices of business confidence. Moody’s Business Confidence Index “weakened sharply in August” and is now hovering around lows not seen since the August 2011 debt ceiling debacle. Mark Zandi, chief economist of Moody's Analytics, said American “business confidence has weakened by nearly every business survey measure.” He attributed the grim feelings to a nervousness over a slowdown in manufacturing and growth all over the world, along with the possibilities of large tax increases and government spending cuts coming up in 2013—the fiscal cliff.
But what about households and consumers? Here, strangely enough, the data is pretty optimistic. Even as businesspeople pouted, the two most widely cited measures of how consumers feel about their current and future economic prospects, the Consumer Sentiment Index and the Consumer Confidence Index, both saw sizable increases in September.
The consumer sentiment index, published by the University of Michigan and Thomson Reuters, rose more than 5 percent in September from August, and is up more than 30 percent in the past year. Richard Curtin, the economist who runs the survey, attributed the improvement(PDF) to a combination of (1) consumers optimism about the economy and labor market in the future; and (2) improving balance sheets, as home prices have started to rise along with stock prices.
Lynn Franco of the Conference Board, which conducts the Consumer Confidence survey, also said that the uptick in home values has helped shore up consumer confidence, which hit a seven-month high in September. Although Franco described the reading, 70.3, as “typically a weak reading,” she told the Daily Beast that “we’re seeing a rebound in housing which affects confidence and consumer spending.”
What’s more, the dim confidence of businessmen isn’t translating into layoffs, according to Zandi. People who have jobs are keeping them, jobs are being created at a slow but steady rate, and home values are rising. Consumer confidence is “localized,” said Franco, and “employment is the most important factor and is the primary source of earnings for consumers.” So, as employment remains at a low level but grows slowly, consumer confidence is more likely to follow that path. Put another way, businesses may be freaked out by what is going on around the world, but consumers are feeling increasingly good about what is going on in their backyards.
The effect of rising home values on consumer spending is well supported by economic research. In a 2009 paper, economists Carl Kase, John Quigley, and Robert Shiller found a strong relationship(PDF) between home values and consumption, one that is “consistently larger than the effect of stock market wealth upon consumption.”
So, even if stock prices, which have been climbing with support from the Federal Reserve’s quantitative easing policy, even out or dip a little because of weak earnings, the rise in home values can still buoy consumers’ consumption and overall confidence. That’s because homes are the biggest asset most families own, whereas individual stock ownership is heavily concentrated among wealthier households. The Federal Reserve has described housing(PDF) as “of greater importance than financial assets for the wealth position of most families.” Its data show that primary residences—basically, homes people actually own and live in—make up almost 30 percent of total family assets.
In 2010, according to the Fed, the median value of a home owned by family was $170,000, and the median value for other residential properties and equity in property owned by households was $120,000 and $65,000, respectively. The median household stock holding, on the other hand, was just under $78,000. These numbers, from 2010, likely understate both median home and stock values for households—the S&P 500 has been going up since March 2009 and home values have started to rise.
For most households, the home part of the equation matters most, as only about half of all households own any stocks and just over 30 percent have holdings of $10,000 or more, according to the Economic Policy Institute. Research by Heidi Shierholz, an economist at EPI, has shown that “since 1989, the top fifth of households consistently held about 90 percent of stock wealth, leaving approximately 10 percent for the bottom four-fifths of households.”
So while the sky may be falling, it seems to be hitting those on top. At least for now.