Confidence May Not Be King
By Brady Willett
Far be it from me to question the legitimacy of the conference board's consumer confidence numbers. After all, the conference board surveys 5,000 households of which 'roughly 3,500 typically respond' – is not how confident 3,500 household are an accurate depiction of how confident millions of Americans are?
Perhaps it is my skepticism on the stability of the U.S. recovery which leads me to believe that skyrocketing consumer confidence is not a good thing, and perhaps also a mirage. Like stocks trading at many (many, many, many) times break-up value I cannot get used to the idea that how the consumer feels, like how most CEOs feel, is of great importance. For certain, the U.S. consumer, who now owns roughly $8,000 in credit card debt alone, can 'feel' good or bad but as Deloitte's Carl Steidtmann points out this doesn't necessarily predict how they will spend.
There can be little doubt that concerns over how sound the consumer's financial position is has forced optimistic economists to look solely at the 'low' unemployment rate when prophesying that the consumer will keep spending. Likewise, a similar type of myopic analysis is exactly why Wall Street analysts typically look to income statements rather than balance sheets to conclude that the markets will rally. In the case of analysts, remember that when stocks began to be valued more by near term profitability rather than by tangible assets, 'valuing' stocks became extremely tricky. This is why corporate raider Carl Icahn has devoured so few companies in recent years and also why during every earnings season a penny or two deducted or added to 'expectations' causes stocks to swing violently higher or lower.
But alas, the consumer will not elect to sell off all their assets and pay off all their debts -- and it is silly to think that they ever would. However, this is exactly what may be worrisome: because while economists, investors and consumers have all become increasingly confident that strong consumer spending trends can be maintained they also recognized that consumer spending has come to the detriment of savings. Is watching the consumer save very little money before, during, and after a recession a 'confidence' boasting trend? No, probably not. However, don't tell that to anyone paying attention to yesterday's conference board survey – consumers are confident!
Meanwhile, while everyone is jumping for joy because the recession is over and consumers are confident, corporate profitability is trying to crawl out the gutter (playing ketch-up to soaring stocks). With this in mind, consider a contradiction: analysts who no longer decipher stock values using a balance sheet perspective are now not even confident in the income statement (near term earnings). Rather, they are just confident (longer term). Why? Because like the extra layering of patties on a Double Big Mac confidence has likewise been layered in quantity not necessarily quality. In the case of the Double Big Mac you don't necessarily get more quality beef, there was very little to begin with, but your perceptual taste buds are sure be overwhelmed by the shear size of the burger. By contrast, a groundswell of confidence in the economy, stocks, and consumer spending has been processed even though it remains to be seen whether or not corporate earnings can add the ketch-up...
Confidence Roadblock?
More than seventy percent of the more than 300 companies polled by the National Association of Manufacturers in mid-march said they plan to "preserve profits by aggressively cutting costs." My take on this survey, which is about as reliable as the conference boards numbers, is that either prices will have to rise or more jobs will have to be cut to 'preserve profits' (the other alternative is that companies will spend money on new productivity enhancing technologies – but extremely low capacity utilization tells us this may not happen anytime soon). Whatever the case may be, in order for companies to attain higher profitability the consumer will be hurt – either their buying power will decrease or more people will lose their jobs. Whether or not how roughly 3,500 consumers feel can change this I do not know.
What I do know is that currently the consumer is confident. How do I know this? Well, because the reputable conference board*, the efficient stock market, and the truthful unemployment figures have told me so. That said, as attention has been drawn away from the consumers balance sheet and focused directly on the income statement (or the ability of consumers to earn money and immediately spend it) placing confidence in 'confidence' has become the equivalent of eating a Double Big Mac and assuming another one is on its way. Remember, it is not quality, but quantity: if enough people gain 'confidence' it spreads like a rash, the mirage becomes a reality.
Even so, before the confidence contagion takes over it may be worth pointing out that the Double Big Mac may not be the King of Burgers. Multiple layers of confidence do not necessarily guarantee that the consumer will not be flame-broiled…
* The conference board does not disclose how many people actually respond to each survey, nor do they disclose the financial position of each respondent.
Brady Willett
BWillett@fallstreet.com
www.wallstreetwishlist.com
April 1, 2002
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