By: Tim Hayes Financial Advisor - posted in: Economy, Markets, and Interest Rates - Last updated Feb 4, 2019

Don’t Overreact to Skyrocketing Consumer Confidence

by | Economy, Markets, and Interest Rates

The last time consumer confidence got as high as this March was in December of 2000 during the tail-end of the dot-com boom. Back then though, it took only three months from that great reading for the U.S. to enter a recession.

There are signs that this March’s high level might be this cycle’s high and that tougher times lie ahead.

Actions Speak Louder Than Words

The same day that the consumer confidence number came out; Bloomberg News ran a story titled Sluggish Bank Lending Is the New Focal Point for Trump Reality Check.

In that article Michele Meyer, an economist at Bank of America, is quoted saying, “One of the stories for optimism at the start of the year was that the gain in confidence and financial market deregulation would spur a rebound in credit creation,” “Surprisingly, the data show the opposite.”

What Happened Before the Great Recession

The previous economic cycle saw consumer confidence peaking in October 2007; then it took only two months for the U.S. to enter the worst recession since the Great Depression.

So, as you can see, very high levels of consumer confidence do not always portend to better times. Sometimes the higher interest rates that go along with increasing confidence set the stage for reduced borrowing, which then leads to the inevitable next recession.

The Federal Reserve

Two weeks before the high reading of consumer confidence, the Federal Reserve raised interest rates for only the third time in this current expansion. They also are hinting that they might raise rates an additional two or three times this year.

It is also possible that the rise in interest rates post-election is what’s causing the slowing demand for new borrowing highlighted by the Bank of America economist.

Keep an Eye on this Spring’s Real Estate Market

The strength of the upcoming Spring, real estate market, will present a good test if the higher mortgage rates are going to put a damper on home purchases. If they do, it will add to the concerns that the growth in consumer borrowing has peaked for this cycle.

If, however, the housing market remains strong, then March’s high confidence number might just get higher, and this long economic expansion might get longer, thus proving that the economy can handle higher rates and that it is stronger than many of us believe.

The Elephant in the Room

Before 1980 when the Government began reducing regulations on bank lending as well as in other areas total private debt in the United States was $4.5 trillion. Today that number is around $66 trillion. (The chart only goes to 2015. After that date, the Federal Reserve broke-up the two components, debt securities and loans into two separate parts.)

So, since 1980 private debt has risen 1366% an average of almost 8% a year. My guess is most of us have not seen our incomes rise by that amount. Thus, with this level of debt not supported by higher incomes, it might not take interest rates to go up that much to have a negative impact on the economy.

Your Investment Strategy

Try not to let monthly statistics get in the way of your long-term planning, as it is just as likely that the opposite of what you would think they portend will happen, happens. The fundamentals have not changed, the stock market is pricey, and the high level of private debt makes it less likely that interest rates will rise much, which keeps your position in bonds from dropping, and until the next recession, we will remain in a slow-growth recovery.

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

Alloway, Tracy, and Sid Verma and Julie Verhage, “Sluggish Bank Lending Is The New Focal Point for Trump Reality Check.” Bloomberg Markets, March 27, 2017. https://www.bloomberg.com/news/articles/2017-03-28/sluggish-bank-lending-is-new-focal-point-for-trump-reality-check

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Tim is a financial advisor that knows how to adjust your financial strategy to adapt to the change’s life throws at you.