It’s no secret that confidence has been a missing ingredient of the U.S. business cycle expansion, which began in July 2009. In fact, confidence has been shaken so much recently that many observers are questioning the health of the economic recovery, and with good reason. The preliminary August reading of the Thomson Reuters / University of Michigan Index of Consumer Expectations fell to its lowest level since 1980 (47.4), the S&P 500 has languished following an abrupt 17% drop in late July / early August (1,151.06), average weekly hours of production and nonsupervisory employees on private nonfarm payrolls in the manufacturing sector fell from a high level last month (41.3), and initial claims for unemployment insurance have been drifting above 400,000 since the first week of August (423,000).
Importantly, each of the aforementioned indicators is a component of The Conference Board’s Leading Economic Index, or LEI, for the U.S. While the LEI increased for its fourth consecutive month in August, stock prices, consumer expectations, average weekly hours and claims were its largest negative contributors. Ken Goldstein, an economist at The
Conference Board, said: “There is growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession. While the chance of that happening remains below 50-50, the odds have certainly increased in recent months.”
This cycle, the surge in consumer pessimism hasn’t been limited to financial conditions and indicators of the real economy. Richard Curtin, chief economist at the Surveys of Consumers, notes that households have “lost confidence in the ability of the government to enact policies that would counteract the growing threat of a renewed recession.” He goes on
to say: “Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role in the economy, and never before have consumers rated economic policies so unfavorably.”
Another depressant to consumer attitudes has been high stock market volatility, due in part to sovereign debt concerns in both the U.S. and Europe. Indeed, the CBOE Volatility Index or VIX (a weighted, constant 30-day measure of the expected volatility of the S&P 500, calculated from out-of-the-money SPX options) spiked to 48 in early August and remains at an elevated level (41.08).
Simply put, volatility (inverted) is a financial market proxy for sentiment and risk appetite. In general, higher volatility typically corresponds with the under-performance of riskier asset classes. Economic and financial market volatility is high under weak economic conditions, which is also the time when investors tend to be the most risk averse. The silver lining is that high volatility is common around major stock market lows. Will President Obama’s $447
billion American Jobs Act pass Congress? Will it be enough to restore confidence and stop the U.S. economy from falling back into recession? We can’t be certain, but the VIX has spiked to levels consistent with major lows in the S&P 500 and investors would be wise to keep a close eye on it.
Talley D. Léger, Investment Strategist, (203) 940-0878
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