Friday, August 28, 2009

A counter point to the U of M Sentiment Report

Or, How bait and switch takes its toll on confidence...

Cynicism: The commentary in the core of the U of M report has some elements that are a bit brighter but it also contains some really dark observations, conclusions and worst of all extrapolations. It is my own conclusion arrived at by looking at the responses to these surveys in the business cycle that they do not always turn up very sharply when economic conditions begin to improve. While people do know their own communities very well, when the news is bleak people tend to be skeptical. Sometimes even good trends are not to be believed.

Extrapolation: In the U of M commentary Richard Curtin Director of the Reuters/Uof M Surveys of Consumers refers to a ray of hope accompanied by the grimmest assessment by consumers of their personal finances since the 'Great Depression'. Thanks for that DICK. Has U of M really been polling people continuously for that long, or was that hyperbole?

Counterpoint on Depression: What can we make of Curtin's remark? First in the weekly ABC consumer comfort poll we can note that the personal finance index is up strongly over the last eight weeks and while it is not by any means in 'great shape' that personal finance index resides in the bottom 15 percentile of its range, a range that does not include the Great Depression but extends back to 1986. To the ABC survey this is not the worst personal financial environment since the Great Depression; it's improving and its not even the worst since 1986.

Unemployment yet to peak: REALLY? -- Next Curtin noted that consumers did see fewer layoffs and thought that unemployment was stabilizing but that it still would peak at over 10%. Man, I wonder what sort of macro-models these men-in-the street are using? 500 equations? 1,000 equations? How would they even know this crap unless they gleaned it from the press, a press that has been predisposed to feature news reports each more pessimistic than the last. So is this question really about what is being reported or what people can parrot back? AWK... Polly want a job AWKK!

NO INCOME GAINS!! Only one in four consumers anticipated any income gains at all in the year ahead. Even with 'low inflation' just 13% anticipated any inflation- adjusted income gains during the year ahead.

Wait one minute! Reality check! This is a curious result to me. Consider this: while municipalities and states are under pressure government workers are generally protected from inflation. Municipal unions are strong and 17% of workers are employed by state, local or the Federal government. That's nearly one-in-five. Next there are retirees whose Social Security payments are indexed by the CPI. And then there is everybody else. Do those numbers make much sense with that survey result?
Other results to compare- The Conference Board does not ask about inflation- adjusted income but its survey asks about income expectations. Positive expectations responses rose to 10.6% from 10.1% in August a monthly rise not a drop. The lowest reading from the Conference Board came in March 2009 when only 7.8% of respondents thought that incomes would rise. There are no inflation adjusted results per se in tha report but the Conference Board survey continues to see inflation expected above 5%. So when Curtin asks in the U of M survey about pay increases above the rate of inflation the response is an interesting one but we don't really know what it means.

Are people matching the correct inflation metric to their own expected pay results? We just don't know.

Can consumer finances really be that grim? While the ABC poll has a consumer finance index that is improving over an eight week period, the U of M survey has the smallest number of respondents saying their finances had improved at all, at 16%. This is interesting. We know house prices are still falling but that the drop has slowed. Stocks are up more than 20% (or much more) from their lows back in March of this year. Average hourly earnings rose in July and the work week got a bit longer (that is for July not August and the U of M survey is for August). In previous research I have found that in looking at the Conference Board data, income expectations responses are closely linked to the inflation environment. The fact that U of M has a question on income relative to inflation does not settle the matter for me, its a better question than the one asked by the Conference Board, perhaps, but not one whose response I would necessarily take to the bank - or what used to be a bank. So what is really going on here? Isn't some of this income response just people admitting that inflation is low?

Bad for this stage THIS STAGE OF WHAT?? Curtin says that 'at this stage' in past recoveries consumers have usually sensed the gains... Okay DICK, what stage of the recovery are you assuming we are in? My reading of these surveys -and granted I do not have the detailed data you do - but in terms of what is made public it seems that your index measures are up from their lows as they should be. After that, early recovery performance is not very well behaved. The end-recession/early-recovery game is not a very stable or consistent one. And since economists are only saying that the recession may have ended in June, we are only two months or so into the recovery period. Are you basing you comments on TWO MONTH"S DATA, DICK? These are two months in which your survey is much sourer than are others. And in these sorts of periods the values for sentiment, the current situation and expectations can turn around like crazy.

Another pessimist feeds his flock - I add Curtin to the forces who are conjuring up analysis that is far too dismal. No wonder people feel so bad. First of all his survey is worse of that the ABC or the Conference Board survey. Second of all, his voice on the matter is, I think, way too glum. Does he really have survey results back to the Great Depression on a consistent sample to make the statement he made? NO! More spin-o-nomics here I'm afraid.

Pessimistic public figures set the tone for U of M respondents - After the first GDP release for Q2 growth showed GDP losses in Q2 were trimmed to 1% the President came out and said there would still be months of recession left. Now Curtin is telling us that in August people are glum. I wonder why? Do they know something or are they reading the papers? One problem with the survey is all these forward-looking questions that we cannot expect people to know anything about. Contrarily, I am impressed that when people are asked reasonably, to evaluate things that they can see and that they can know about, they detect improvement. But when you ask them to forecast the future what do we get? We get the responses from people who just heard the President days ago say that it's not a recovery yet so they act like it's not a recovery yet when they present their expectations.

Questioning the results: I would ask Mr Curtin why with stocks soaring, the U of M current personal finance index fell to 58 in August from 70 in July? Job losses slowed sharply in July - we do not know about August. Layoffs have been at a reduced pace for several months, and, in the survey itself, respondents said that trend continued. What is driving these bad survey results? I find them astonishing and, moreover, not very credible.

At turning points: I have concluded in my own research that in the Conference Board index the business conditions survey made the most cyclical sense. The business conditions responses are the stronger ones in this report from U of M this month, too. I think the consumer is being raked over the coals in part by politicians looking to get approval for their next big spending agenda.

VENTING I'M VENTING!! YOU WON'T LIKE ME WHEN I'M VENTING - Let me vent on one such item here. The Obama economic team tells us we cannot stabilize the economy without heath care reform. They talk about huge future medical demands on the system. They use this as an excuse to get support for their medical reform bill. One problem: that bill does not solve the problem. If the problem is the size of the medical deficits in the future, it makes those worse. The kind of health care reform we need is not on the table. It may never be on the table. But this is Obama and friends playing bait and switch.

BAIT AND SWITCH - Yes, this is exactly the kind of bait and switch economics that has gotten us in trouble again and again and has pumped up the deficit. Former President George W. Bush fired one of his economic experts when that expert said (in what proved to be quite a correct assessment) that the war in Iraq was going to cost much, much more than the White House said. The White House knew it but it pressed ahead with its agenda not wanting to be derailed by a public that would trip over an inconvenient fact. Now in the Obama administration inconvenient facts again are being submerged. If you ever wondered why I can't bring myself to join a political party, this is it.

Feeling alright? not feelin' so good myself... No wonder consumers feel so crappy, so confused, so mislead, they are the sheep that are led to slaughter. This is not how politics and economics in America are supposed to work. The consumer is supposed to have the facts to deal with to make a decision, not so much spin he can't get a handle on it.

That's part of the problem.

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Can one really believe the economic reports. With any degree of confidence.