US consumer sentiment confirms Boom/Gloom Index weakness

Economic growth

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Index Jun13.pngIt is now 4 years since the blog launched its IeC Boom/Gloom Index, as a way of measuring the difference between sentiment and economic reality. Its purpose then was as follows:

“Markets are driven by two factors, sentiment and fundamentals:

• Fundamentals can be followed by analysing hard data. In chemical markets, for example, key areas include new housing starts, auto sales, industrial production, Asian exports, etc. This data can also be used to make forward projections
• However, sentiment is equally important, as it tells us what markets think is going to happen next. Sentiment can often contradict fundamentally-based forecasts. Usually it involves financial players, often using price charts to time their entry and departure”

Since its launch, an entirely new effect has been seen, namely the concerted effort by central banks to manipulate financial markets higher via their liquidity programmes (orange arrow). They mistakenly believe, as Ben Bernanke wrote in January 2011, that this will provide the so-called ‘escape velocity’ needed to stimulate a recovery in consumer spending.

US consum confidMay13.pngIn actual fact, as this month’s Index shows, sentiment (blue column) has remained fairly weak. It has failed to follow the S&P 500 Index (red line) higher. This is confirmed by the second chart from Barron’s, showing developments in US consumer confidence since 1977, as measured by the Conference Board.

It highlights how the current recovery has only taken confidence back to levels previously seen at recession bottoms (green line). Whilst May’s figure of 76 sounds positive to those who assume it is a percentage, it is just half of the peak seen in the late 1990’s – when all the BabyBoomers were in their peak spending years.

Household consumption is 71% of US GDP. One day, people will look back and be amazed that policymakers continued to ignore the impact of demographics on the economy, despite evidence such as this.

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