US Consumer Confidence Measures

The Thomson Reuters/University of Michigan final Consumer Sentiment Index dropped in August to the lowest level since November 2008. It fell to 55.7 this month from 63.7 in July. The index of current conditions, which reflects Americans’ perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, decreased to 68.7 from 75.8 the prior month. The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 47.4, the lowest since May 1980, from 56.0.



US consumer confidence slumped in August to its lowest level since April 2009, according to the latest monthly Conference Board report. Its closely watched consumer index sank to 44.5 this month, from a downwardly revised 59.2 in July. The survey’s labor market indicators were especially weak. The percentage of respondents agreeing that “jobs are hard to get” rose from 44.8% in July to 49.1% in August, the highest reading since November 2009. The percentage who expects that there will be fewer jobs available in six months jumped from 22.2% to 31.5%, the highest since April 2009. These latest figures suggest that the US labor market is deteriorating again.



US Economic Indicators

Hooray, we are still in the soft patch! That seemed to be the stock market’s reaction to yesterday’s personal income and consumption report for July. The 0.8% increase in personal consumption expenditures (PCE), which beat expectations, was led by a 10.0% increase in spending on new cars and a 5.2% increase in spending on household utilities. Excluding these two categories, spending rose 0.5%. It’s also up 0.5% excluding gasoline sales. Proponents of the soft patch scenario, including yours truly, anticipated that auto production and sales would improve right about now as Japanese car parts became more available following the disruptions caused by Japan’s earthquake.

At the start of this month, real GDP growth reports for the US, the UK, Germany, and France during Q2 all were disappointingly close to zero. The plunge in stock prices during the first four weeks of the month suggested that investors no longer believed that the soft patch would be followed by better growth, but rather by a recession. We also gave up on better growth during Q4, but we remain in the soft patch camp.

There has been no soft patch in capital spending. That’s because capital spending is driven by corporate profits, which have been very strong, as discussed in yesterday’s Morning Briefing. Indeed, while Q2 real GDP growth was revised downwards slightly from 1.3% to 1.0% (saar), nonresidential fixed investment was revised upwards from 6.3% to 9.9%. Spending on equipment and software was revised higher from 5.7% to 7.9%, and structures rose 15.7% rather than the preliminary estimate of 8.1%. During July, nondefense capital goods shipments rose for the third straight month, up 0.2% and 12.9% over the past three months, at an annual rate. That’s the best pace in a year.

European Stocks & IFO

The DAX is down 22.6% so far this month and 19.9% ytd. It is down 26.4% since it peaked on May 2. And this happened in the strongest economy in Europe, and maybe in the world. It hasn’t been quite as bad in the US, where the S&P 500 is down 8.9% mtd, 6.4% ytd, and 13.7% from its April 29 peak. The DAX is now near its lowest level since February 2010. The S&P 500 is still 15.1% above last year’s low on July 2. The DAX tends to be highly correlated with Germany’s IFO Business Climate Index, and suggests that the financial crisis in Europe may be depressing Germany’s economy.

 

Why has the S&P 500 outperformed the DAX so far this year? In 2008, the US was the epicenter of the financial crisis. This time, it is Europe. The FTSE Eurofirst 300 banks euro index is down 26.6% mtd, 31.6% ytd, and 41.1% since it peaked this year on Febuary 17. The S&P 500 Bank stock index is down 15.2% mtd, 23.2% ytd, and 28.5% since it peaked this year on February 14. Clearly, there isn’t likely to be much upside for stocks, in general, until bank stocks start to perform better, especially in Europe but also in the US. So what are top policymakers doing to avert another financial meltdown and to shore up the banks? That’s what we discuss in Monday’s Morning Briefing.



Manufacturing Surveys



There are six regional Feds that survey manufacturers in their districts every month. We update their findings in our US Business Surveys chart book. We also show the results of surveys conducted by five regional purchasing managers’ organizations for manufacturing. So far, there are three surveys available for August. They are the Fed surveys conducted for the Richmond, Philadelphia, and New York districts.

The average of the overall indexes for the three fell to -16.2 during August from -0.5 last month and from the most recent cyclical peak of 25.6 during March. It is now the lowest since April 2009. The average of the new orders indexes dropped to -15.2 in August from -3.5 in July and from the most recent cyclical peak of 21.2 during February. It too is now the lowest since April 2009.

There was a comparable soft patch in these averages last summer, with the overall average falling to a 2010 low of -1.8 during August. The new orders average fell to a low of -6.1 during August. However, this time, the averages are already lower than their lows of last year.

The plunge in the Philly index during August was shocking. It has been more volatile than the other surveys recently. However, both the Richmond and New York surveys are confirming that manufacturing turned weaker in August. During the month, the overall indexes fell to -30.7 in Philadelphia, -10.0 in Richmond, and -7.7 in New York. These are all new lows for this year and below their lows of 2010. The new orders indexes fell to -26.8, -11.0, and -7.8 in the three aforementioned districts, following the same pattern as the broader indexes.



S&P 500/400/600 Earnings & Valuation



The bull market in the S&P 500 from March 2009 through April 2011 was driven by strong earnings that more than offset the slight (though volatile) downtrend in the valuation multiple. Industry analysts never flinched during this period. They remained consistently bullish and consistently overcame the worries of investors, who were reassured by the fact that earnings beat even the analysts’ upbeat forecasts for the past nine quarters.

  

It all fell apart during August when valuations plunged, as I reviewed in yesterday’s Morning Briefing. The consensus forecast of industry analysts for the S&P 500 held up remarkably well through last week. But their forecasts for the S&P 400 and S&P 600 may be starting to fray at the edges. Investors seem to have concluded that a recession is coming. They know from experience that if a recession is coming, industry analysts are likely to be among the last to throw in the towel. The analysts tend to do a much better job of forecasting earnings during expansions than during recessions.

Of course, if instead of another recession, we get a protracted period of slow growth in both the US and global economies, as we currently expect, then there may not be much more downside in valuation multiples. On the other hand, there is downside in analysts’ consensus expectations for earnings given that we are now forecasting $100 a share for 2012, while the bottom-up forecast is around $113.