19 Year High In Consumer Comfort

CEO Confidence Improved

CFO confidence improved in Q4, but most see a recession in the intermediate term. That's a positive because firms are planning to raise wages quicker and expect earnings to increase faster. Businesses being more conservative can lessen the risk of a slowdown turning into a recession. Leverage makes weakness worse. 

If consumers never took out mortgages they couldn’t afford, the decline in housing prices in the late 2000s wouldn’t have been as bad and led to as much economic strife. There were also instances of too much leverage from the banks in that period obviously. On the negative side, by preparing for a recession, these firms are also investing less which explains the negative business investment growth in the past 2 quarters and potentially in Q4.

CFO sentiment overall rebounded sharply. As you can see from the chart below, so did CEO confidence. This makes sense in both cases because there isn’t going to be a recession soon. As the chart shows, CEO confidence in Q3 was near where it troughed in previous recessions. The trough in Q4 2008 was after a bad recession had been ongoing for a year. 

We haven’t even seen a recession start yet. CEOs were simply too pessimistic. We should see a recovery in confidence without a recession. This chart is daunting because it also shows the yield curve inversion signaling a recession. Both indicators will be wrong. Inversion last year wasn’t a good recession indicator.

Specifically, CEO confidence improved from 34 in Q3 to 43 in Q4. There were still more negative than positive responses because it was below 50, but this is a strong step in the right direction. Q3 confidence was the lowest in a decade. 15% of CEOs said conditions got better in Q4 compared to 6 months ago which was up from just 8% in Q3. Only 52% say conditions are worse which is down from 73%.

There were also improvements in expectations. 12% expect economic conditions to improve in the next 6 months compared to just 4% last quarter. In theory, Q1 2020 still includes 6 months in the future from Q3 2019. But I think the economy will rebound, proving CEOs wrong. 44% expect conditions to get worse which is down from 67%. That’s a big swing. Interestingly, CEOs plan to increase prices by only 0.4% which is down from 1.6% last year. Personally, I think that’s more of a reflection of current decisions inflation should increase in 2020.

MBA Mortgage Applications & Consumer Credit

In the week of January 3rd, the MBA mortgage applications composite index fell 1.5% weekly after falling 5.3%. Refinance index was down 8% after falling 5%. Good news is the purchase index was up 5% after falling 5%. Yearly growth was 2%. 2020 will face much higher comps than 2019 because the housing market improved last year especially in the 2nd half of the year. 

Many expect lower growth, but on an absolute basis the numbers will be strong. Keep in mind, that this report includes New Years Eve and New Years Day which doesn’t make it as valuable as it usually is.

In November, monthly consumer credit growth fell from $19 billion to $12.5 billion which missed estimates for $16.7 billion and matched the lowest estimate. That’s not a huge surprise because income growth was stronger than consumption growth in November. 

Specifically, non-revolving credit, which is student loans and car loans, was up $14.9 billion which was up from the $11.1 billion increase in October. Revolving credit, which is credit card debt, was down $2.4 billion which was down from the $7.9 billion increase in October.

It’s surprising that consumers didn’t take out more credit card debt in November. This data is seasonally adjusted, so maybe the adjustment was too strong. November retail sales report was adjusted too harshly. Non-seasonally adjusted retail sales growth fell from 3.9% to 2.9%, but last year had a 6 day earlier Thanksgiving. The only way to determine how the holiday went is to see the December retail sales report and the revised November numbers.

Consumer Confidence Increases Further

In the week ending January 5th, which is the first week of the year, Bloomberg’s Consumer Comfort index increased 1.2 points to 65.1 which is the highest level since October 2000. Each of its 3 components was up for the 3rd straight week. The index measuring the state of the economy was up 1.4 points to 69.7 which is nearly a 19 year high. Indexes measuring personal finances and the buying climate were each up at least 1 point. 

As you can see from the chart below, the consumer comfort index from Bloomberg predicts the Conference Board index. That’s good news for the consumer and spending growth in January. It looks like the consumer is starting the year off on the right foot.

This was the Bloomberg consumer comfort index’s 7th increase in 8 weeks. Bloomberg states consumers are confident because the trade war is winding down, the stock market is exploding, and the unemployment rate is low. Within the report, comfort from women, those ages 45-54, college graduates, home owners, and white Americans was the highest since 2000. Married consumers had the most confidence ever. The index was 74.3. 

Overall the index is up 4 points in the past 3 weeks which is the best run since October 2015. It has increased sharply since the 9 month low in November which was 58. If this index is a correct signal of retail spending, maybe sales growth really wasn’t great in November. Either way, we will see a rebound in December because it increased then.

Conclusion

CEO and consumer confidence improved. Consumer confidence is at a multi-cycle high, while CEO confidence is just bouncing off its 10 year low. Mortgage purchase applications increased slightly in the first week of the year and revolving consumer credit fell in November. That matches the 9 month low in consumer comfort. 

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