Consumer confidence, leading indicators both falling

As noted before, perhaps the greatest difference between the US and the Canadian economy is not our ‘sound’ banking system nor out ‘conservative’ consumers, but rather the fact that we still have confidence in our short term economic prospects, while they don’t.

Our economy is largely driven by consumer spending, as is the economy of the US.  Think of this economy like an internal combustion engine or more specifically a carburetor.  The gasoline is credit, which ultimately drives our pseudo growth.  But that gasoline alone won’t propel the car.  It needs to be mixed with oxygen for it to become more combustible.  In our economy, this oxygen is consumer confidence.

Without consumer confidence, credit sits idle or even contracts, dragging growth with it.  But the mixture of easily available credit and consumers who are eager to spend it is a combination that will provide explosive growth to an economy….at least until that credit has to be repaid.  Once peak credit is reached, the lee side of that slope is highly deflationary.

So it was with great interest that I read the following article from the FP detailing the current state of consumer confidence in Canada:

Consumer confidence drops to post-recession low

“Canadians’ optimism on the strength of the economy dropped in the third quarter of 2010, particularly in Ontario and British Columbia,”the Nanos report said. “The latest quarter also saw a decrease in real estate optimism, particularly in Ontario.”

Uh oh!

Interestingly, we also found out yesterday that Canada’s index of leading economic indicators fell for the first time since April 2009.  If you’re not familiar with the concept of a leading indicator, it is something that gives an early glimpse into what economic growth will be in the near-term future.  In other words, leading indicators turn negative before the broader economy does, and they turn positive before the broader economy does.

Canada Leading Indicator Falls for First Time Since April 2009 on Housing

“Canada’s index of leading economic indicators unexpectedly fell in September, the first decline since April 2009, led by housing and manufacturing.”

I love how it ‘unexpectedly’ fell.  You know what they say about economists:  If all the economists were laid end to end, they’d still not reach a conclusion.  My prediction is out there.  A renewed recession by Q3 2011 for the two reasons captured in the snippet above; falling house prices leading to falling aggregate demand (manufacturing).  I’ve spent lots of time explaining the relationship between house prices, consumer confidence and consumer spending, employment, and economic growth, so that’s all I’ll say on that for today.

I’d like to return to the article above on consumer confidence for one last quote, which serves as an excellent segue.

“Maybe they (consumers) would be more amenable if they felt the strong arm of long-term economic leadership rather than short-sighted stimulus and its tax-and-grab corollary”

WOW!  What a quote!  It is a perfect transition into this next article, which nicely ties in with my post yesterday:

U.K. spending cuts foretell our future

“In what are being called the United Kingdom’s “worst” government spending cuts since the Second World War, the coalition government of Conservative Prime Minister David Cameron Wednesday delivered a message that is soon to be heard around the world.”

“It’s a message already received this year in Greece and now daily in France, where demonstrations, roadblocks and violent protest are disrupting the economy. It’s a message that will sooner or later sweep across North America.”

“The words in the message are austerity, spending reductions, fiscal restraint, government layoffs, deficit elimination, debt reduction, spending freezes, job cuts and reduced entitlements, tax increases and lower benefits.”

It’s coming!  The age of austerity will force itself upon us.  It will be for our own long-term benefit, but will be painful in the interim.  Rather than fight it, my hope is that people will recognize that the debts accumulated at all levels in virtually every society in the West, are completely unsustainable.  Period.  They need to be dealt with.  It means the next 10 years will look nothing like the last.  And that’s not even counting the massive fallout of a falling housing market and rising unemployment.

I’m not at all insensitive to the economic hardships this will cause, and I’m fully prepared and willing to see my own wages cut, or perhaps my current position cut in an attempt to correct the economic ills of our society.

I’d like my son to grow up in a world that is unburdened by the irresponsible excesses of prior generations, which would have to be borne by his through higher taxes, lower services, and a lower standard of living.  That’s not right.  I’m happy to be a part of the change that will ensure that he can experience true economic prosperity.  That change involves a return to what was once common sense, but today seems anything but.

Keep your eye on consumer confidence readings, leading indicators, and housing sales and prices.  As they all fall in unison, you’ll know what awaits us.  How you choose to deal with the social and political climate that will accompany this fallout is up to you.  I do hope you’ll consider the big picture.



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One Response to Consumer confidence, leading indicators both falling

  1. Whisperer says:

    Good info Ben. Thanks.

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