And You Wonder Why I’m Bearish On Holiday… Largest Weekly Drop in U.S. Economic Confidence Since ’08

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  • on October 8th, 2013

I get a lot of flack from investors and pundits alike on how bearish I am on the U.S. consumer. Trust me, I want things to be better. But from my perch and the research I conduct on the consumer, it’s a lot worse than you think out there for American consumers.

Today’s  stunning Gallup Poll reinforces my view, with the weekly drop in U.S. economic confidence the largest since the fall of the House of Lehman. Further, the government shut down is weighing heavily on the minds of consumers. My co-author and Chief Economist at Bloomberg LP, Joseph Brusuelas said it best in last week’s Bloomberg Economic Brief:

“The shutdown of the U.S. federal government, if short-lived, should have only a modest impact on overall growth and spending in the economy. The greater risk from the shutdown is not the temporarily lost income among federal employees. it is the shutdown’s indirect effects on economic activity and consumer confidence. According to the Bureau of Economic Analysis, the average income per federal employee is $78,436, excluding health care, pension and other fringe benefits which account for an additional $40,000 per annum. Private sector workers earn $59,809 in wages and receive about $28,000 in added benefits.

A temporary loss of wages on a weekly basis for federal workers equates to about $1.2 billion per work week. if the shutdown were to last for five weeks, that would amount to 9.5 percent of the total change in income received on a quarterly basis.

Thus, the income generated by those workers is equal to approximately one-half of 1 percent of total GDP on a monthly basis, or one-twentieth on an annualized basis, and comprises about 7.5 percent of total personal consumption expenditures.

If the shutdown lingers for a few weeks, the economy will probably slow to less than 1 percent growth in the fourth quarter of the year. As a result, the following quarter may receive a boost as government workers’ lost income will be paid, resulting in an increase in consumption. “

And for some really startling data, check out the Gallup results below. I’ll let you make your own conclusions.

Weekly Drop in U.S. Economic Confidence Largest Since ’08

Decline of 12 points to -34 is largest since Lehman Brothers collapsed

by Alyssa Brown

WASHINGTON, D.C. — Americans’ confidence in the economy has deteriorated more in the past week during the partial government shutdown than in any week since Lehman Brothers collapsed on Sept. 15, 2008, which triggered a global economic crisis. Gallup’s Economic Confidence Index tumbled 12 points to -34 last week, the second-largest weekly decline since Gallup began tracking economic confidence daily in January 2008.

Largest Weekly Declines in Gallup's U.S. Economic Confidence Index

Fiscal brinksmanship in Washington is related to many of the largest weekly drops in Americans’ confidence in the economy since 2008. Gallup’s Economic Confidence Index fell nine points in late February and early March 2013 as Congress and President Barack Obama failed to reach an agreement to avoid automatic federal spending cuts as part of sequestration. Economic confidence fell eight points during the week ending Feb. 20, 2011, as Congress and the president reached an agreement on the federal budget at the last minute, avoiding a government shutdown.

Americans’ confidence in the economy fell eight points during two separate weeks in July 2011, as leaders in Washington debated over whether to raise the debt limit or default on the nation’s debts. Standard & Poor’s subsequent downgrading of the U.S. credit rating and falling U.S. stock market prices also negatively affected Americans’ confidence in the economy. Similarly, economic confidence could continue to fall in the coming days and weeks as Congress and the president work to reach an agreement to raise the debt ceiling by the upcoming Oct. 17 deadline.

Still, economic confidence bounced back within several months of the 2011 debt crisis and the downgrading of the U.S. credit rating. Likewise, confidence rebounded within weeks of the sequestration spending cuts that took effect in early March 2013. This suggests that these fiscal debates may not affect consumer confidence in the same long-term negative way that hits to the economy — like the 2008-2009 economic recession — do.

Gallup’s Economic Confidence Index has plunged 19 points since the middle of September and is now, at -34, at its lowest level since late December 2011. Confidence is significantly worse than it was in late May and early June of this year, when it peaked at -3.

Gallup Economic Confidence Index -- Weekly Averages, January 2008-October 6, 2013

Gallup’s Economic Confidence Index is based on two components: Americans’ assessments of current economic conditions in the United States and their perceptions of whether the economy is getting better or worse. Since mid-September, the outlook component of the index has fallen twice as much as the current conditions component.

Currently, 67% of Americans say the economy is getting worse, the highest such percentage since early December 2011, while 28% now say it is getting better. This results in a net economic outlook score of -39, down 17 points from the prior week.

Last week, 15% of Americans said the economy is in excellent or good shape, and 43% said it is poor. This results in a net current conditions score of -28, down seven points from the prior week.

While Gallup’s three-day rolling averages sank 14 points to -34 for Oct. 1-3 as the shutdown began, they have since stabilized at -35 through Oct. 6. This may be a positive sign that the partial government shutdown itself will not drive Americans’ confidence much lower — something the intensifying debate over the debt limit and the possibility of default could do.

Gallup Economic Confidence Index, Three-Day Rolling Averages, Sept. 3-Oct. 6, 2013

Bottom Line

Gallup’s Economic Confidence Index seemed poised to enter positive territory in late May and early June, but never did and has grown more negative since. The government shutdown dealt Americans’ confidence a big blow, resulting in a one-week 12-point drop in the index — the second-largest weekly drop since Gallup began Daily tracking in January 2008, and the largest decline since the week Lehman Brothers collapsed.

While the economy is, in many respects, stronger than it was during the 2011 debt ceiling crisis, the current budget debate and government shutdown clearly show that partisan brinksmanship and the uncertainty it causes on Wall Street can negatively affect consumer confidence. Thus, Congress’ inability to reach a compromise to end the government shutdown and raise the debt ceiling could negatively affect U.S. stock prices, America’s credit rating, and, ultimately, the nation’s economic recovery.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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