Archive for June, 2010

Unconfident consumers

29 June 2010

Well, can you blame them?

After two bubble-based expansions, in which first a tech stock bubble (1990s) and then a housing bubble (2000s) helped fuel huge levels of consumer debt, it seems rational for consumers to conclude that they’ve been living beyond their means and hence to retrench.  Today’s report of a 10-point drop in an already-low consumer confidence index is some hard cheese just the same.

The linked story, above, is a good one in that it actually provides information as to what is a “normal” or “good” level of the index.  90 is pretty good, 100 means “strong growth.”  So this month’s reading of 52.9 (again, down 10 points from May’s) is awful.  The best that can be said for it is that it’s double its all-time low of 25.3 in February 2009.

The story also mentions weakness in the housing market, where the Commerce Dept. reported Wednesday that new-home sales in May dropped 33% from their April level.  While a big drop is not shocking in view of the April 30 expiration of big tax credits for homebuyers, it was larger than expected, and the annualized rate of 300,000 new homes purchases is the lowest in the history of the Commerce Dept.’s survey (which began in 1963).  Again, considering the giant bubble in the housing market that preceded the current slump, it seems plausible to me that we have not yet hit bottom, i.e., the market may still have some correcting to do.

I hate to sound like a liquidationist, but if it’s true that the economy was on steroids thanks to a housing bubble and a frenzy of consumer debt, then our “natural” standard of living may be a good bit lower than we’d care to admit.

UPDATE, July 4:  Dean Baker says the housing bubble still has some deflating to do, in particular in California, New York, and Illinois.  He says house prices in those states are still way over trend levels and still abnormally high in relation to rents.