J.P. Moczulski/The Globe and Mail
Consumer confidence in the U.S. continues to be shaky and that indicates more belt-tightening ahead, which could be bad news for an economy that is being weaned off government stimulus and looking for consumers to step in to fill the gap.
WHAT ARE THE EXPECTATIONS?
"Rocky equity markets and soft job growth likely pulled consumer confidence down for the second straight month in July," said Sal Guatieri, a senior economist with BMO Nesbitt Burns Inc.
The U.S. Conference Board's consumer confidence index is forecast to have declined to 51 in July, compared with 52.9 in June, according to a survey of economists by Bloomberg.
And the health of the consumer is critical, accounting for almost 70 per cent of the U.S. economy.
"Consumer confidence has failed to improve meaningfully in the past year, and remains mired at recession levels, suggesting demand will stay soft until labour markets strengthen," Mr. Guatieri said.
"But consumer confidence doesn't seem to be a particularly good indicator of consumer spending," said Bill Cheney, chief economist with MFC Global Investment Management, an arm of Manulife Financial Corp. "The Gulf oil spill likely damaged consumer confidence, but it is unlikely to determine spending. It is the ability to spend that is compelling - jobs and income."
It will take an improvement in the jobs market to generate increased spending, Mr. Cheney said. "We should be getting to a point where we see some decent job growth."
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CONSUMERS NEED JOBS
There is also something else afoot, said Kent Engelke, chief economic strategist and managing director of Capitol Securities Management. The negatives factors for spending are clear - consumer credit has been contracting for 20 months and it is where it was in 2005, while the unemployment rate is around 9.5 per cent, he said. "Still, while not robust, consumer spending has not fallen off a cliff," he said. "The underground economy [people unemployed but still earning money]is considerably stronger than expected," he added.
However, the critical factor needed for a resurgence in consumer confidence and spending is hiring by Corporate America, Mr. Engelke said. "Somewhere Corporate America will spend money to hire, to make acquisitions and invest in capex, and that will lead to hiring and greater consumer spending," he said. "Productivity is huge because we are working the heck out of everybody."
And the cash on the corporate balance sheets will be the driver of this turnaround, Mr. Engelke said. Companies in the S&P 500 hold a record $1.8-trillion (U.S.) in cash and it should be $2-trillion by the end of the second quarter, he said. That money is available for investment that should spark growth and employment, he said.