10/3/12 – U.S. Consumer Expectations Are Recovering

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Oct 3, 2012 12:02:12 PM

and tagged Market Updates

Leave a comment

A couple of good things to talk about today for the U.S. economy. The first relates to the generally improving demand environment. I have talked before about the fact that the housing market is getting better; the trend continues today with mortgage applications increasing by 16.6 percent, which is a lot. Cheaper mortgages continue fuel the housing recovery, and the story is not over yet.

Housing is important for several reasons. First, it is typically a driver for many other purchases like new furniture, appliances, lawn care—the list goes on and on. Second, and in my opinion even more important today, housing is the best representation of the future expectations of the American consumer. Think about it: When you buy a house, you are making what is probably the largest purchase you will ever make; you are most likely borrowing a multiple of your annual income and tying yourself to that debt and that house for 30 years. Will people make that commitment if they are not optimistic about the future?

The evidence shows they will not, and if the housing market is recovering, then consumer expectations about the future—I won’t say optimism—must be recovering as well. Consumer spending is about two-thirds of the economy, and consumer expectations are among the most important factors that drive spending. A recovery in housing suggests that a recovery in consumer spending is much more likely.

Of course, you can’t base anything on one data point. What we need here is something like housing—a large multiyear commitment to a fixed asset, largely financed with debt, that is also bought by consumers. Conveniently enough, we have exactly that in the auto market. Like housing, a car is a multiyear commitment of a lot of money, bought with long-term debt. Because cars are cheaper than houses, with a shorter time commitment and less debt involved, you would expect a change in confidence to result in even more of a bounce in auto demand to confirm the signal from the housing market.

And that is just what has happened. In today’s papers, we have “Passenger Cars Lift US Sales” on page B2 of the Wall Street Journal (WSJ) and “Auto Sales Are Highest in 4 Years” on page B1 of the New York Times (NYT). Higher levels of auto sales may reflect exactly the kind of increase in confidence suggested by the housing market, and the fact that both are saying the same thing increases the reliability of the signal.

Autos are also a high multiplier sector, with cars supporting a wide range of other businesses; as a result, they share with housing a large economic footprint. Again, the fact that both are doing much better than in recent years suggests that the effects may start to mount.

And, again, the evidence supports this. A better-than-expected ISM Manufacturing survey earlier this week was joined today by a better-than-expected ISM Non-Manufacturing survey. To take it out of geek-speak, businesses are reporting stronger growth than they were previously. In addition, a major employment survey came in strongly today.

None of this is to say that we are out of the woods, but the trees certainly seem to be thinning a bit, at least here in the U.S. Other parts of the world should be so lucky.

Upcoming Appearances

Tune into Fox Business' Countdown to the Closing Bell on Friday, July 12, at 3:45 P.M. ET to hear Brad talk about the market. Check your local listings for availability.

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®