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Hard Times Persist in November 2008—Consumers See A Glimmer of Hope

Posted December 1, 2008

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When surveyed during the first ten days of November 2008, a near record proportion of consumers felt they could not afford to sustain their current rate of spending given the unfavorable balance between their assets plus income and their debt plus spending obligations.

The Consumer Balance Index (CBI) – which tracks consumer perception of their financial balances – dropped ten points month to month between September and October, from 83 to 73. It then advanced a tick in November, but still down 21 points from 95 in October 2007, to stand at 74 – only one point above the yearly low of 73.

The 21-point October 2007 to October 2008 decline was not gradual. Eighteen points of the 21-point decline took place in two abrupt steps: initially, an eight-point month-to-month decline from 95 in October 2007 to 87 in November 2007 and then the aforementioned ten-point decline between September and October 2008, from 83 to 73.

A September to October 2008 ten-point decline reflects a major destruction of consumer spending power, largely from a decline in assets – the value of common stock, other financial instruments and homes – rather than a decline in income.

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The Consumer Balance Index (CBI) measures how consumers experience change in the economy. As such, the CBI can be used, gingerly, as a co-incident indicator of change in the economy.

The eight-point October to November 2007 decline in the CBI and the subsequent ten-point September to October 2008 decline appears to have signaled the onset of recession in November 2007, and then the ten point drop its deepening a year later in October 2008.

NOTE: Subsequent to the conduct of the November 2008 consumer survey, the onset of recession, based on macro-economic statistics, was officially set in December 2007.

Not all consumers experience change in the economy simultaneously and to the same extent. To examine the differences in how consumers experience change in the economy, the population is divided into five segments, with each segment delineated on the basis of their financial balances.

Using data from the October 2007 and October 2008 surveys, households with a CBI of 163 are included in the segment with the “Strongest” financial balances.

Four additional segments of households follow with progressively weaker financial balances, including households with: the “Second” strongest financial balance (a CBI of 109); then “Middle Strongest,” with a CBI of 73; then “Fourth Strongest,” with a CBI of 36; and finally, households with the “Weakest” financial balances, having a CBI of 18.

Between October 2007 and October 2008, the proportion of households with the Strongest CBI (163) declined by 45%, or 16 points, from 29% in 2007 to 13%. The 45% decline in households with the Strongest CBI was offset by gains in the proportion of households with Middle or lower CBIs (78 to 16).

The net effect of this shift in the distribution of households was a 22-point year-to-year decline in the CBI of the average households from 95 to 73, signaling a major reduction in the proportion of households feeling they could afford to sustain their current pace of spending.

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Consumers with Strongest and Second Strongest financial balances (CBIs of 163 and 109) have higher incomes, more education, live in larger households, and have more workers per household than households with weaker financial balances (CBIs of 73, 36, or 18).

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Households with the Strongest CBI’S not only have the means to sustain their current level of spending but also – given their demographics – a greater propensity to spend.

For food, clothing, and other day-to-day expenditures, the higher the household’s CBI the higher the percent of households that spend freely – that is, do not try to cut back on spending.

For example, the percent spending freely on food declines progressively from 62% among households with the Strongest financial balance (CBI’S) of 163) to 17% among households with the Weakest financial balances (CBI of 18).

Systematic declines in propensity to spend for clothing, gasoline and medical services are also associated with reductions in the household’s CBI.

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The reduction in the proportion of consumers with the highest CBI’S between October 2007 and 2008 has a disproportionately large depressing effect on spending, not only for day-to-day items – food, clothing, gasoline, medical services – but also for major goods: autos, housing, appliances, personal computers, and the six other major goods for which information is collected in the monthly surveys.

For example, the percent of consumers actively shopping for a new car declines progressively from 10% among consumers with a CBI of 163, the Strongest financial balances, to a low of 2% for consumers with the Weakest and Fourth Strongest financial balances.

Systematic declines in the percent active shopping are also noted for used cars, housing, and seven other major products covered in the survey.

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LOOKING AHEAD

The CBI is an indirect and co-incident, rather than a forward-looking indicator of change in the economy. The “dead cat bounce” from a CBI of 73 in October – after its precipitous ten-point decline from 83 in September – to 74 in November indicates that the consumer did not experience much of any month-to-month improvement in the economy.

For those inclined to associate changes in consumer confidence with increases in consumer propensity to spend, survey statistics showing October to November improvements in consumer expectations about the economy are encouraging.

Interviews conducted immediately after Obama’s election as President was announced find that there was a 16-point increase in the percent of consumers who expect the “economy to get better,” from 36% in October – which is close to the low for the year – to 52% in November, which is the high for the year. The percent who expect “things to go better for the country” jumps 11 points from 6% in October, the low for the year, to 17% in November, the high for the year.

Mirroring the spurt in consumer confidence, the Index measuring active shopping – checking prices, visiting dealers – for cars, housing and other major goods moves up from 81 in October (the low for the year) to 91 in November, which is in the mid-range for the year.

The gain in the Active Shopping Index is a hopeful sign, even though it measures only intention to buy major goods – not actual purchases. However, given the growing desperation of sellers, the discounts sellers offer may enable them to close sales with active shoppers.

On the negative side, consumers have not relaxed restraints on actual day-to-day spending. The Index measuring the propensity of consumers to shop without restraint for food, clothing, gasoline, and medical services moves up by only two ticks from 71 in October – which is itself a tick above the low for the year – to 73 in November, which remains only three points above the low for the year.

The CBI is a co-incident, not a forward-looking indicator. The spurt in consumer confidence about the future indicates that consumers turned hopeful. But, hope did not substantially change their appraisal of their current financial balances. The CBI for November remained at 74, which is just a tick above the low for the year.

For the CBI to improve enough to encourage an increase in consumer spending, the economy must improve enough so that consumers experience: 1) an increase in their assets (value of stocks, other financial assets, housing); 2) a substantial and secure increase in their incomes relative to their debt; or 3) a reduction in the costs of the products they buy, allowing their dollars to go farther.

One hopeful development is that the government is pumping money into financial institutions to improve their financial balances. However, there is no sign yet that money pumped into financial companies has trickled down to and enhanced consumers’ financial balances.

Another hopeful development is that retailers and manufacturers are discounting their prices sharply in an effort to increase their sales. However, there is no sign that the reduction in prices has reduced the prices of products consumers buy sufficiently to enhance their perception of their financial balances and induce them to accelerate spending.

We will be able to see the effect on consumer propensity to spend of these two hopeful developments in mid-December, when the next CBI reading will be released.