U.S….What’ s up doc?

The food industry is largely dependent on consumer spending and economic growth. Therefore, this is valuable to have an overall understanding of the current trends before investing.

The two most widely followed indicators of consumer confidence jumped to the highest levels in seven years last week. The Conference Board reported Tuesday November 4, 2014 that its Consumer Confidence Index climbed to 94.5 in October, the strongest reading since October 2007 before the economy entered the Great Recession.
The solid increase suggests consumers largely dismissed concerns about slowing global growth and have ignored the sharp swings in financial markets in October. Instead, greater hiring and lower gas prices are boosting their outlook.
US consumer confidence rebounded strongly in October, hitting a 7-year high as solid job gains and falling gas prices raised expectations for economic growth. This came despite slowing economic growth in Europe and China that has fueled volatility in financial markets.

Then on Friday October 31, the University of Michigan’s Consumer Sentiment Index rose from 84.6 in September to 86.9 in October, the highest level since July 2007. It was the third consecutive monthly increase in this Index. Respondents to both surveys cited expectations of better economic growth and job gains in the coming months, along with falling gasoline prices, as reasons for their optimism.

On Thursday, October 30th advance report on 3Q Gross Domestic Product came in at a better than expected 3.5% instead of 3% following the 4.6% showing in the second quarter. According to the advance report, the increase in GDP in the 3Q primarily reflected positive contributions from consumer spending, exports, nonresidential fixed investment, federal government spending and state and local government spending…
The Fed has also taken the decision to end quantitative easing (QE) last Wednesday. A further analysis of the official statement released after the policy meeting yields more clues as to when the Fed might start raising interest rates finally.
Second, as for US inflation, which is running below the Fed’s target of 2%, the Fed noted that falling energy prices are the main reason inflation has retreated as of late. They expect inflation to increase modestly when energy prices bottom out.

Yet at the same time, the latest polls on the Direction of the Country show that a 66.0% of Americans believe the country is headed in the wrong direction with only 27.8% who believe the nation is moving in the right direction. There is a huge disconnect between these measures of consumer confidence versus how Americans feel about the direction the country is headed.
So the question is, how can consumer confidence be at a 7-year high when two-thirds of Americans believe the country is headed in the wrong direction?
As always, the economic signals are mixed. However, the headline numbers over the last year support the public’s optimism.
It is true that a big increase in defense spending and a drop in oil imports accounted for a good part of the stronger growth in GDP this year. Moreover, true, too, spending on business equipment (+7.2%) and by consumers (+1.8%) grew more slowly in the 3Q than in the previous quarter, but at least such spending did expand.
The Fed has done its part, arguably, by holding short-term interest rates near zero for the last five years and buying trillions of dollars of long-dated Treasury bonds and mortgage-backed securities to keep long rates low. While the Fed did end its QE bond-buying program as promised, it committed to keep short rates near zero for a considerable time.

Then there are those anecdotal statistics that are useful supplements to the more closely followed government reports:
o Gasoline prices are plunging as new supply exceeds shrinking demand, putting cash into consumers’ pockets just as the holiday season starts. The rule-of-thumb is that every 1-cent-per gallon price decline adds $1 billion to consumer purchasing power.
So the 30-cent drop in the past month gives consumers $30 billion more to lavish on toys, apparel, and, of course, iPhones. In addition, economists estimate that every $1 decline in gasoline prices is associated with a 10% increase in sales of cars and trucks, especially of highly profitable SUVs and light trucks.
o Hundreds of thousands of holiday jobs are available. The seven largest retailers have 400,000 openings that are proving so difficult to fill that employers are “bombarding customers’ inboxes and Twitter feeds with help-wanted ads,” according to the Wall Street Journal. Many retailers ring-up between 25% and 50% of their annual sales in the next few months.
o Profits of leading corporations are up, and after some violent gyrations, the S&P 500 Index is up over 10% from the record level reached at the end of last year. This is good for investors and suggests a strong holiday shopping season.
o Finally, Apple’s iPhone 6 and 6Plus accounted for an estimated 10% of all recent US economic growth, adding 0.3% to overall GDP. Innovation is always a good thing.

Taken together, the economic news does explain the uptick in consumer confidence, although that confidence is dampened somewhat by gloomy economic news from Europe, China, Brazil, Russia, and other countries, as well as by stagnant middle-class incomes, and a job market that could be stronger. The improving economic outlook marches in parallel with a largely bipartisan fear that the institutions of government are just not fully working.

The legislative branch, Congress, is dysfunctional. Democrats are split between moderates appealing to independent voters and the left that is rallying the party’s “core” to remain on a “progressive” path to the 2016 presidential election. Republicans are afraid to speak out on politically sensitive issues and are divided by the Tea Party that sees compromise as weakness.
Other institutions are also in ill repute. The Centers for Disease Control, once the most widely respected government agency, fumbled its response to Ebola, unnerving a public that once looked to the CDC for guidance when faced with a health scare. The Department of Veterans Affairs is unable to deliver adequate healthcare to the nation’s veterans. .
All of this has to be a big part of why two-thirds of Americans believe the country is headed in the wrong direction long-term, even as confidence in the short-term is riding high.

However…Consumer Confidence Hit a 7-Year High in October!

 

Reference: Gary D. Halbert and Investors Insight.

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