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Economy Can't Recover With Just Checks Being Sent to Consumers

Economy Can't Recover With Just Checks Being Sent to Consumers

By Tuesday, 31 March 2020 03:44 PM Current | Bio | Archive

INDICATOR: March Consumer Confidence and Confidence Commentary

KEY DATA: Confidence: -12.6 points; Current Conditions: -1.6 points; Expectations: -19.9 points

IN A NUTSHELL: “Either households are delusional or we will have to wait another month to find out what is the true state consumer confidence.”

WHAT IT MEANS: There continues to be a stream of economic data coming out, but most of the numbers are still for February and even January, when the economy was totally different. The past tells us nothing about the future. So, I am concentrating on reports that describe what the current economy may look like. Today the Conference Board released its reading on a more recent indicator, March consumer confidence, and it did plummet. But the decline was less than expected. The reason was that, at least according to the Conference Board’s respondents, current economic conditions deteriorated minimally in March. According to the report, “The percentage of consumers claiming business conditions are “good” was relatively unchanged at 39.6 percent”. Really. I am not sure what country these people live in, but it cannot be the United States of America. Monaco? Maybe. USA? No way. Well, maybe they all live in rural communities that are not part of the energy sector and have no interaction with the rest of the world. I have a friend who lives in North Central Vermont and his town of 2,000 is doing just fine. Maybe they surveyed all of his neighbors. Okay, enough trash talk about the survey. If a significant number of the surveys were done early in the month, maybe that explains the results. But with the Waffle House closing restaurants (they almost never do) and 3.3 million people filing for unemployment compensation in the middle of the month, it is hard to believe that current conditions didn’t deteriorate significantly from February to March in almost all parts of this country. So, let’s just forget this report ever came out.

Commentary: Consumer Confidence and the V-Shaped Recovery: Well, it looks like cabin fever has overtaken me. If my comments about the Conference Board’s survey seem a little over the top, that is the excuse. I managed to get to a couple of supermarkets and now have at least two weeks of food, so I am officially shut off from direct human contact except for my wife and son. I hope I still have a family when all is said and done. And that is coming from someone who is not in a densely populated area. I cannot imagine what it would be like if that were the case.

My comments about my state of mind were not made just for fun. The key indicator will be consumer psychology. It will take the consumer bouncing back before a vibrant economy returns. Fear of economic insecurity is taking hold and it is being exacerbated by health fears. We need to first overcome the fear of being around people. Then, given that we could see unemployment rates at the highest level since the Great Depression (possibly mid to even high double digits) we will have to overcome the financial uncertainty created by large numbers of people losing their jobs. That does not go away quickly.

The point is that we have to follow the consumer confidence reports closely. Not just the headline number but also the sub-indices that measure expectations, current conditions and opinions about the labor markets. The University of Michigan’s Consumer Sentiment index plummeted and the report indicated that the last two weeks of the month, it pretty much collapsed. Another major drop in confidence is still to come and it may be the largest on record.

The economy cannot recover with just checks being sent out to people. Depressed people don’t shop ‘til they drop. Those that live on the edge will spend everything, but those that continued to work and make a decent living will likely hoard much of those funds. Businesses may take the government money and transfer workers from the unemployment rolls to the marginally productive (or even nonproductive) private sector payrolls, but that doesn’t mean firms will ramp up business activity sharply. They still need demand for their products and if consumers remain uncertain, those sales will just not be there. What will have been accomplished is that the economy may be stabilized somewhat, unemployment compensation expenses will be replaced by government funded, private sector payroll costs, the measured unemployment rate will be lower than it would have been, but growth will not likely accelerate significantly.

What we need to see is consumer confidence hit rock bottom and then start to rise before consumption will pick up in a sustained manner and the hoped for V-shaped recovery can take place. Unfortunately, the driving force for that happening will not be just the government and Fed/Treasury bailout program; the end of the pandemic needs to be in sight. How long it will take to get to that point is anyone’s guess.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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The economy cannot recover with just checks being sent out to people. Depressed people don’t shop ‘til they drop.
virus, economy, recover, consumers
Tuesday, 31 March 2020 03:44 PM
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