Obama & CCI: Why it Matters

Obama & the Consumer Confidence Index (CCI): Why it Matters

A daisy chain of bad news seems to be forming around Obama. Consumer confidence in the U.S. has continued to deteriorate in the month of June as consumers are more pessimistic about the short-term outlook of the economy and in early July, consumer sentiment cooled to its lowest level in seven months.

The relationship between consumer sentiment and whether a president gets reelected can be tied to consumer confidence. And, the current levels of confidence are consistent with Carter and George H. W. Bush when they lost reelection. See chart above.

The Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are about the future prospects for the economy and its financial health as it correlates closely with joblessness, inflation, and real incomes. Consumers drive economies. Consumption spending represents about 56% of our GDP and consumer spending drives 70% of U.S. economic growth.

Started in 1967 and benchmarked to 1985, the Index result was arbitrarily set to 100, representing the index’s benchmark. This value is adjusted monthly on the basis of a household survey of consumers’ opinions on current conditions and future expectations of the economy.

Opinions on current conditions make up 40% of the index, with expectations of future conditions comprising the remaining 60%. Indicators indicate. And today, economists and analysts are paying especially close attention to consumer behavior.

An increase in consumer confidence indicates economic growth, resulting in more demand and ultimately money in the economy whereas a decrease in consumer confidence implies a slowing of the economy, whereby people are saving more and spending less – output will fall as demand also falls.

A monthly downward trend would be an indication to manufacturers to slow down inventory production because consumer demand may be down. Conversely, a monthly increase in CCI may direct manufacturers to increase inventory because consumers are buying.

Some economic indicators are subtle, nuanced or otherwise difficult to grasp straight off the page. Not so for consumer confidence. Its one of the most closely watched economic indicators. It’s a lagging indicator, which means it follows economic trends. It lags because most people don’t really feel that the economy has changed until after it actually has.

Broadly speaking, lagging indicators confirm long-term trends. They can serve as three broad functions: to alert, to confirm and to predict. Confidence is a strange thing. The relationship between economic policy uncertainty and consumer confidence can be telling. And, the CCI should worry Obama.

From 1967 until 2012, The Conference Board’s CCI averaged 93.4. In June, the CCI dropped to 62.0 from a downwardly revised 64.4 in May, falling for the fourth consecutive month. Economists had expected the index to slip to 63.5 from the 64.9 originally reported for the previous month.

Note: Another well-established index that measures consumer confidence is The Thomson Reuters / University of Michigan’s Consumer Sentiment Index (CSI). The index is normalized to have a value of 100 in December 1964. Their consumer sentiment dropped to 72 in early July from June’s 73.2 reading. The gauge was projected to rise to 73.5. It was the lowest level since December 2011.

While the CCI is a lagging indicator, and serves to gauge consumer’s attitudes towards the economy, it also confirms if a turn in the economy can be expected to “have legs” into the future. And, we can see how dependable the CCI is at confirming economic changes by comparing trends in the CCI with previous periods of economic change — recessions and recoveries.

The election year October CCI for three (3) previous incumbents who lost the Presidential election were:

• 1992: 57.3   (Bush I)
• 1980: 80.3  (Carter)
• 1976: 87.1   (Ford)

The two previous ‘Summer of Recoveries’ from Obama have brought consumer confidence down from the early summer compared to October.

• 2010: June 62.7 –> October 48.6
• 2011: June 61.7 –> October 46.4

Considering that the June 62 CCI might repeat its trend to under 50 CCI by October, just as it did after the two previous summers of recovery, it would explain why the Obama campaign is getting desperate. So, in a sense, the CCI can be designed to be both a lagging and a leading indicator.

The rosier the outlook on nationwide employment, income and savings, the more confidence we have, and the more we spend and invest. The CCI is certainly not the only important economic indicator, but since it’s a lagging indicator, it will continue to trend in the direction of the GDP and employment economic indicators. Both of which, also show indicators in the rearview mirror.

The total US Debt/GDP ratio is on the verge of crossing 102%, the highest since WWII. Retail sales declined in June on expectations of an increase of 0.2%. Goldman Sachs cut their Q2 GDP estimate to 1.1%. And, consumers’ dwindling confidence follows a sharp slowdown in hiring in April and May. June unemployment U6 is 15%. Weekly jobless claims ending July 14 reached 386,000.

Private payrolls, which exclude government agencies, increased by 84,000 in June, capping the worst quarter for corporate employment since the first quarter of 2010. To mask all this, look for The Fed to ‘dangle the carrot’ for more monetary stimulus in the form of QE3 or more Twist to ‘sugar high’ the economy prior to November. Not that it will do any good, if they did, but desperate times…

This election will be decided on economic uncertainty issues and Obama is in trouble.

The CCI can be helpful in confirming the direction of the economy, and sometimes even predicting it, so it is certainly worthwhile to pay attention to this index reporting each month between now and November to see a trend. The CCI Survey results are released on the last Tuesday of each month at 10am EST.