Consumer spending is very critical to the U.S. economy, as it makes up a significant portion of the gross domestic product (GDP). If consumer spending declines, then U.S. GDP growth becomes very questionable; when it increases, it can provide an idea about where the U.S. economy is heading.
I look at consumer confidence as one of the indicators of consumer spending. The logic behind this is that if consumers are confident, they will most likely spend more, compared to when they are pessimistic.
Sadly, the consumer confidence in the U.S. economy seems to be deteriorating these days. This is definitely not a good sign if we want the U.S. economy to improve going forward.
Look at the Conference Board Consumer Confidence Index, for example; in October, it witnessed a slide of more than 11%, having stood at 71.2 in October from 80.2 in September. The Consumer Expectations Index declined 15.5% in the same period. (Source: "Consumer Confidence Decreases Sharply in October," The Conference Board web site, October 29, 2013.)
Some will blame the decline in consumer confidence on the U.S. government shutdown. This may not be completely true, however, as we have been seeing continuous deterioration in consumer confidence. Please look at the chart of the University of Michigan Consumer Sentiment Index below.
Chart courtesy of www.StockCharts.com
The University of Michigan Consumer Sentiment Index stands at the lowest level of 2013 in October. It has been declining since July.
Currently, we are seeing too much attention being paid to the key stock indices making new highs each day, but not to the underlying factors that affect them.
Consumer confidence declining suggests that consumer spending going forward is going to be bleak. We are already seeing some effects of this; for example, companies on key stock indices are showing their sales below expectation.
Consider this: as of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings, and only a little more than half of them were able to beat the estimated revenues. (Source: "Apple continues to be largest drag on S&P 500 technology sector earnings growth," FactSet web site, October 25, 2013.)
If this trend continues, which I think it will, then it can do a significant amount of damage. For example, if consumer confidence plummeting results in decreasing consumer spending, the retailers will face troubles. And if those retailers are not able to sell product, they will have to reduce staff to stay profitable, and so on.
But that's not all: consumer spending declining could affect the GDP. The growth rate estimates we hear now may not be the same a few months down the road.
Investors have to be really cautious about what kind of investments they make. If their portfolio consists of companies in the consumer discretionary sector, they should consider taking some profits off the table or reducing their exposure to the sector.
This article Why Consumer Confidence is Falling at an Alarming Rate by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter