Economy Improves and Is Increasingly Resilient
Posted:
Between March and April, the Consumer Balance Index (CBI) ticks up from 77 in March to 78 in April 2009, to stand five points above the October 2009 low of 73 but 17 points below the pre-recession reading of 95 in October 2007.
8Sages’ mid-March report headlined “Economy Grows in First Quarter” anticipated Obama’s and Bernanke’s mid-April announcements that – to paraphrase – they see glimmerings of hope for the economy but the road to recovery could be long and bumpy.
The resilience of the economy has increased during the past nineteen months of recession, but the economy continues vulnerable to unanticipated events of the sort that triggered sharp declines in economic activity in November 2007 and October 2008.
The ability of the economy to bounce back from a steep decline in activity is related to a number of factors, two of which have moved favorably and one which has not.
Investor Confidence
Investor confidence in the value of publicly traded securities increased sharply between March and April.
To track investor confidence, the following question is asked of a national sample of consumers who have savings or retirement funds invested in common stocks or mutual funds that invest in commons stock:
“If the market went down 10%, which would be about 800 points on the Dow, do you think you would invest more, take your money out of the market or do nothing at all?”
When the economy went into a steep decline in October 2008, the ratio of buyers to sellers declined sharply, from 1.68 buyers in September to 1.08 buyers per seller in October, and continued its decline, reaching a low of 0.61 buyers to each seller in February.
Then, in step with an almost 30% increase in the Standard and Poor 500-stock index, investor confidence surged from the low of 0.61 buyers per seller in February to 0.94 buyers in March and 1.43 in April.
The ratio of 1.43 buyers to each seller in April is within striking distance of the ratio of 1.50 buyers to each seller that obtained in pre-recession October 2007.
Consumer Confidence
Many more consumers in April 2009 than in pre-recession October 2007 are confident about how things are going for the country and its economy.
Specifically, the percent who say “things are going better for the country” jumps from 17% in pre-recession October 2007 to 31% in April 2009. Also, the percent who say the economic picture for the United States is improving jumps from 31% in pre-recession October 2007 to 57% in April 2009.
Consumer confidence is bolstered by a major increase in the percent of consumers who are pleased with their President, which moves from 26% in January (the last days of the Bush administration) to 50% in February, 56% in March, and 58% in April.
Consumer Financial Balances
On the negative side, while consumers are increasingly confident, they currently feel they lack resources to spend aggressively. In effect, while their spirit is willing to spend, their purse is weak.
Consumers with the Strongest financial balances are well fixed enough to spend aggressively in the face of a recession. In April 2009, they constituted only 16% of all consumers, up a tick from 15% in March but down from 29% in pre-recession October 2007.
In Summary
The economy is currently rebounding but remains vulnerable to adverse events that can reduce the level of economic activity.
Over the past 20 months, the economy has been weak, unstable but increasingly resilient. After each sharp decline in economic activity, the economy immediately began to rebound
The Consumer Balance Index
The Consumer Balance Index (CBI) is computed on the basis of information from national consumer surveys conducted monthly that determine whether consumers see the balance between their income and assets versus their debt and spending shifting favorably or unfavorably.
Statistics in this report are based in interviews with 9,687 male and female consumers interviewed at the rate of 480 consumers per month.
In that consumer financial balances are affected by changes in the level of economic activity, the CBI serves as a co-incident indicator of change in economic activity.
The CBI anticipates official government economic indicator reports issued by the National Bureau of Economic Research (NBER) and the Bureau of Economic Analysis (BAE). Government reports on the economy are necessarily delayed in that they are based on information collected during a complete month or complete quarter.
The validity of the CBI is monitored by comparing its movements to reports on change in economic activity issued by the NBER, BEA and other authoritative agencies.
In review:
- The eight-point decline in the CBI from 95 in October to 87 in November 2007 was followed by months of slow but irregularly improving economic activity. The improvement was not robust enough to restore the economy to its pre-recession level of activity. Validating the CBI finding that the economy was depressed, the National Bureau of Economic Research (NBER), after eleven months of study, declared the nation was in a recession that had begun in December 2007.
- The CBI declined ten points from 83 in September 2008 to 73 in October 2008 – which is the first month of the fourth quarter – and then ticked up in November and again in December, marking a sharp decline in economic activity between the third and fourth quarter of 2008. That sharp decline in economic activity was confirmed on March 26, 2009 when the Bureau of Economic Analysis (BEA) announced that the nation’s Gross Domestic Product (GDP) had declined by 6.3% between the third and fourth quarter of 2008.
- The CBI increased from 74 in the fourth quarter of 2008 to 77 in the first quarter of 2009, indicating a rebound in economic activity is in progress.The first BAE estimate of economic activity in the first quarter of 2009 will be issued on April 26. Their final estimate may not be issued as late as June.
It is important to recognize that the CBI describes what has already happened. It does not forecast economic change but, by anticipating the changes that the government will eventually report, delivers tomorrow’s news about the economy today.
TO MAKE SUGGESTIONS OR ASK QUESTIONS:
Please phone Leo J. Shapiro, CEO of SAGE Survival and Growth Enterprises LLC. He can be reached in Tucson, Arizona at 520-878-0188.
Copyright April 2009 by Leo J. Shapiro – All Rights Reserved.