Recession Eases in January Economy Remains Fragile 

Two indicators show the recession eased in January. But, there are indications that the economy remains fragile.

Indicating the recession eased, the Consumers Balance Index (CBI) rose five points between December and January. The five-point gain in the CBI between December and January 2009 is coincident with the roughly 25% gain in stock prices between their November low and the highs reached in the first days of January, which increased the value of consumer assets.

Overall, by January 2009 the CBI recovered seven of its 22-point decline from its pre-recession reading of 95 in October 2007 to its November 2008 low of 83.

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The CBI tracks consumer ability to sustain their current level of spending by ascertaining how they gauge the balance between their income and assets versus debt and spending obligations. An increase in CBI indicates a favorable shift in financial balances signaling a potential increase in consumer spending. A decrease in CBI indicates an unfavorable shift in financial balances and signals a potential reduction in spending. 

So far, this recession has been marked by a 55% decline in the proportion of consumers with the Strongest financial balances (a CBI of 163), from 29% in pre-recession October 2007 to 13% a year later when the CBI was at its low. This decline in the CBI is coincident with a major decrease in the value of houses, common stock and other consumer assets.

The second indication that the recession eased is a three-point gain in the proportion of consumers with the Strongest possible financial balance (a CBI of 163) from 13% in November to 16% in January. The three point increase in CBI is coincident with the roughly 25% gain in stock prices between the stock market’s November low and the high reached in the first days of January. These gains enriched assets held by the roughly half of consumers who own common stock or mutual funds.

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The signs are that the recession reached “a” bottom in October, but it is not clear that the recession has reached its absolute bottom, in that there are indications that the economy remains fragile.

Consumers are not confident. The Index tracking the proportion of consumers actively shopping – visiting dealers, checking prices – for new cars, housing and eight other major goods declined 14 points, from 95 in December to 81 in January. 

Clearly, consumers are saving rather than spending all their income. More consumers in January than in December report they had money left over for savings at the end of the month.

Consumer savings, the fruit of consumer frugality, are coincident with reductions in retail sales. News of depressed retail sales spooks the stock market, depressing stock prices, reducing consumer assets and, potentially, can depress the CBI.

However, this major gain in the value of stocks between the market’s November low and the high reached in the first days or January did not  turn investors optimistic enough to support stock prices when they declined sharply in early January.

..LOOKING AHEAD

Consumers take a cautious, wait-and-see attitude. Almost two in three (64%) feel the recession will last for two or more years. As of January, 49% of consumers say they have been “hurt by the financial crisis.” Four in ten consumers (40%) say they have “done something to protect themselves from being hurt by the financial crisis.” Only 6% of consumers feel the crisis will end within a year.   

It comes as no surprise that the recession is seen by consumers as painful and intransigent, which is why both the outgoing and incoming administrations say they are willing to spend large amounts of federal government funds to ease the recession.

As of January, there is no definitive indication that the massive transfers of funds the federal government has already made to financial institutions have had a measurable positive effect or have made consumers optimistic.

Consumers, hunkered down to weather hard times, react to what they actually experience and are relatively indifferent to predictions that actions taken by the government will bring relief from hard times.  

The next report on the CBI will be released in mid-February.  In the interim, please feel free to contact Dr. Leo J. Shapiro personally by calling 520-878-0188 with suggestions, ideas, questions, comments, requests for information. 

 SOURCE OF INFORMATION

Information for computing the CBI in this report comes from 8,200 consumers interviewed by phone at the rate of approximately 480 consumers a month during the seventeen-month period starting September 2007 through January 2009.  Each sampled household reports whether their household‘s financial balance – the difference between their income plus assets versus their debt plus spending obligations – is improving, worsening or remaining constant.

Data from monthly surveys are weighted to compute the CBI INDEX from the raw survey data.

To secure monthly CBI readings, e-mail leos8111@comcast.net and request that the CBI data be forwarded to you by e-mail as soon as they become available.  There is no charge for this service.

Copyright January 2009 by Leo J. Shapiro – All Rights Reserved.