Don’t Overreact to Skyrocketing Consumer Confidence

by | Apr 30, 2017 | Investing Your Money, Key Topics

The last time consumer confidence got as high as it was this March was in December 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.

Actions Speak Louder Than Words

The same day 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, said, “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.”

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

What Happened Before the Great Recession

The previous economic cycle saw consumer confidence peaking in October of 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 better times. For the higher interest rates that go along with increasing confidence sometimes 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. The Feds also hint at two or three more rate increases this year. And this post-election rise in interest rates may be causing the slowing demand for new borrowing that Meyer highlighted.

Are Interest Rates Heading Up?

Keep an Eye on this Spring’s Real Estate Market

The strength of the upcoming spring real estate market will test whether the higher mortgage rates will 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, 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 is stronger than many of us believe.

 

The Elephant in the Room

Before 1980, when the U.S. government began to reduce regulations on bank lending and in other areas, the total debt in the United States was $4.5 trillion. Today that number is around $66 trillion. (This chart goes only to 2015. After that date, the Federal Reserve broke up the two components, debt securities and loans, into two separate categories.)

So, since 1980, debt has risen 1366%—an average of almost 8% a year. My guess is that 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 interfere with your long-term investment planning, as the opposite of what you might think the consumer confidence highs foretell is just as likely to take place. 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 increase much any time soon. This keeps your position in bonds from dropping, and, until the next recession, we will remain in a slow-growth recovery.

Investing Your Money

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