Everyone Is Scared Out of Their Minds

No, really.

July's consumer confidence fell to the lowest level since March 2009:

Source: University of Michigan/Reuters.

The date that the confidence level has reverted back to is meaningful. In March 2009, the financial crisis was in high gear, stocks traded at nearly half of the value they do today, the economy was shedding half a million jobs a month, and it looked like a real possibility that Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) would be nationalized. Growing, high-quality companies like Amazon (Nasdaq: AMZN  ) and Apple (Nasdaq: AAPL  ) could be bought for next to nothing -- both companies traded like they'd never grow again, even as actual earnings came in beautifully. Fear replaced reality. Nobody had faith in anything. If it ever felt like we were in a legitimate depression, it was in March 2009.

Do consumers really feel as glum today as they did then?

Consumer confidence is driven by four big factors: stocks, gas prices, jobs, and policy -- probably in that order.

The current slump likely isn't caused by stocks. Major indexes are still spitting distance from multiyear highs. It probably isn't gas prices, either. While higher than they were a year ago, gas prices have fallen 11% over the past two months. Jobs likely have something to do with it, as June's official government employment numbers were pretty much a bust. But even that isn't convincing: Jobs have been slow for months, and other private job measures show June might not have been as bad as the government's numbers imply.

What's left? Policy. And here there's a culprit flailing its arms: the debt ceiling.

It's hard to say for sure, but odds are the debt ceiling charade drove the sudden plunge in confidence. Even if everyone thinks the ceiling will eventually be raised, witnessing this much dysfunction in Washington does a number on confidence. The irony is that the reason some politicians are digging their feet in on the debt ceiling is because they say deficits are causing business-crippling uncertainty, but their tactics for dealing with those deficits is creating even more.

If there is any good news, it's that consumer confidence is a coincident indicator. It tells you what just happened, not what's about to happen. Its ability to properly forecast stock and job growth is basically nil, and if anything it serves as a contrarian indicator. The future becomes brightest when the mood is the darkest. And it's pretty dim in here.

Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Apple. The Fool owns shares of and has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 18, 2011, at 3:10 PM, awallejr wrote:

    I have to agree, this is "self inflicted" courtesy of Washington. There is no real reason to have put up an "armageddon" deadline which the Republicans have. I think they overestimate the support of any mandate given to them from the 2010 elections. This is all people are hearing and reading about, come August 2 the US and world economy may collapse. Bernanke is saying it. Geitner is saying it. These are people that at least have far more knowldege and availability to information than I or pretty much everyone so I am really not in a position to dispute them.

    I am tired of hearing "don't worry it will be raised" yet another day goes by and nada. Why wasn't this an issue when Congress passed the last budget which they knew or should have known would exceed the ceiling?

  • Report this Comment On July 18, 2011, at 4:06 PM, badnicolez wrote:

    @awallejr: The "armageddon" deadline was not set by the Republicans - that is strictly an administration creation. And who is using words like "armageddon" and threatening to cut off social security checks? One hint - it isn't the Republicans.

    I think Obama is severely underestimating the mandate that the Republicans received in the 2010 elections to slash spending, create jobs, and restore some fiscal sanity to Washington, and I think it's going to cost him the presidency in 2012.

    The Democrats in congress (now controlling just the Senate) haven't passed a budget since 2009. Congress passed a continuing resolution at the end of last year, not a budget.

  • Report this Comment On July 18, 2011, at 5:41 PM, Cushing1 wrote:

    Basically, I am a conservative. I fully agree with Republicans about the need to cut back heavily on spending. But I disagree with their refusal to increase taxes on the very wealth (over $400,000 or so in annual income.

    Both parties seem far more interested in legislation which they feel will ensure their reelection than in acting in the best interest of their constituents. Neither seems willing to eliminate costly loopholes which give unfair tax breaks to those with strong lobbyists.

    If Congress fails to reduce the government's booming deficits, our children and future generations will suffer from a declining value of the dollar, high taxes, escalating inflation and continuing high unemployment.

    Time is running out but it isn't too late to redirect government policies to salvage America's historically high standards of living.

  • Report this Comment On July 18, 2011, at 7:29 PM, awallejr wrote:

    @badnicolez but it is when they painted themselves into a corner and said they refused to raise the ceiling if any budget includes tax increases. How can you compromise when one side keeps saying no? The August 2 date is the day Geitner says is when the money starts to run out. So yes, they did in effect create this date. They are trying to save face now with this McConnell shuffle.

    There was absolutely no reason to use the debt ceiling as leverage.

    I am an Independent, I vote either party, but I am telling you now I am holding the Republicans responsible for this mess.

    While I am tired of hearing the phrase "fair and balanced" because that is pretty much vague, compromising is the nature of democracy. If one side is willing to give in the other side needs to as well, otherwise you get deadlock. And while in the legal system you can ultimately get a third party arbitrator to break the deadlock, there is none for Congress.

    Raising the ceiling is for past expenses. As for future ones I think there is wide support for reducing expenses but you need to be mindful of the impact as well.

    You can't shift the burden on the little guy all the time. The big boys get bailed out with 100s of billions, yet give the little guy a small new car credit and everyone shouts foul.

    You can't lower entitlements alone causing the little guy to bear the brunt, and let millionaires keep their taxes low.

    I get tired of hearing how the rich are the ones that create the jobs and pay most of the income taxes. Well they do on income tax because they make a ton compared to the little guy. And that little guy does pay tax every time he buys gasoline, or makes a phone call or goes shopping, convenient facts not mentioned.

    As for jobs it is the little guy who comes up with new ideas and slowly builds a 1 or 2 man company into a major business. Yes they got financing along the way but that had to do with good business decision making, regardless if a millionaire paid 35% income tax or 25%.

    I am all for lowering the taxes for small and mid cap companies especially, but that revenue needs to be made up somewhere else aside from deep cost cutting. I am also for allowing companies to repatriate profits back into the US. While I don't think this she be a regular event but perhaps lower the repatriation tax hit. Even if that repatriation leads to just giving shareholders dividends that is still more cash flwoing inside the US than otherwise would be.

    I have lots of other ideas but health precludes me from running for office so I rant here on TMF.

  • Report this Comment On July 20, 2011, at 2:52 PM, MrChapel wrote:

    @awallejr

    The big problem is that for 800+ days, the democrats have not been able to produce a budget, yet keep spending in a way that would make drunken sailors in port after 6 months at sea, blush.

    Another big problem is regulation that is ever more convoluted, ever growing. Witness how the new 'Affordable Care act' is keeping companies from investing because every single day, a new, here-to-fore unknown regulation comes out of it. Remember Pelosi saying "We need to pass it, so we know what's in it"? If it's such a great thing, why then, are so many waivers issued? BTW, isn't it against the law to give waivers to entities etc. that basically lets them circumvent and ignore the law? Because that's what the waivers are. It makes others more equal then those who don't get those waivers. I take it that's also 'fair and balanced'?

    One thing US citizens don't seem to know is that you don't live in a democracy. You live in a Republic. Examine the differences between those two concepts.

    The freshman representatives who have been sent to DC are there with a single mandate, namely restore fiscal sanity in the Beltway. They're faced with a bunch of five-year olds who demand new toys, ice cream and staying up late. The only way to deal with those five-year olds is to be firm with them. Get them to produce a budget of their own, something they've not done for over two years or at least talk about the budget proposed by the other side. They don't want that, all they want is for things to stay the same. At the moment, between local, state and federal taxes, everyone who actually pays taxes, is handing over up to fifty percent of their income to taxes.

    Between taxes and regulation, is it any wonder that businesses are fleeing California? Is it any wonder that businesses are fearful to invest, instead hoarding the cash on their balance sheets? Let's see which industries the president has offended already:

    ATM industry: notwithstanding that the number of banktellers stayed essentially the same, notwithstanding that ATMs are responsible for setting up a totally new industry with thousands of new jobs, according to the president, they actually reduced the number of jobs.

    Aircraft industry: airplane manufacturers were hardest hit during the economic crash in 2008/2010. Cessna shut down numerous plants and laid off fully half of its workforce, some 8000, the last 700 announced in September 2010. In that number is not included the number of jobs that are lost at subcontractors. So let's tax the corporate jet owners, hm? I'm sure that if that happens, the remaining 8000 employees at Cessna plus those remaining at other aircraft builders will be getting their pink slips within a year and the general aviation industry in the US will be just as vibrant as the general maritime industry is. Meaning, not at all.

    Coal industry: the president said clearly that he was planning policies that would make it necessary to raise energy prices. Lo and behold, the EPA's new regulations that will be in effect in the next three years. Already, many utilities that have coal-fired plants are planning on shutting them down. Not upgrading them, not replacing them. Shutting.Them.Down. Energy prices will go up. Brownouts and blackouts will be the new normal. Companies who depend on a steady flow of energy (every damn company and business) will suffer losses and will be looking to relocate to areas with a guaranteed, if expensive, power supply. Might be another state, might be overseas.

    Oil industry: Kafka would be proud with regards to getting a drilling permit. But the president gives billions to Brazil so they can bolster their oil production.

    How about the new Consumer Protection Agency? Starting out with 500 personnel (to be expanded to 1500) and a budget of over 300 million dollars? For what? To make sure people can read the fine print on a contract? Excuse me, but the fine print is an outcome of all the rules and regulations that businesses operate under. Maybe it would be smarter to go over all those rules and regulations and look into making them clearer, more easily understandable? Not to mention, you are supposed to read the fine print, not just put your signature there.

    I find it shocking that in the last five years, people have become blase about the trillions of dollars that are thrown around. I can remember when mentioning a billion dollars in conversation would have people all fluttering because it was such a huge number. It wasn't that long ago, barely a decade. Now? It's peanuts. Fiscal sanity is gone the way of the dodo. The American Revolution was fought because of taxes. In many ways, it's happening again.

  • Report this Comment On July 20, 2011, at 2:59 PM, LyfordJr wrote:

    <i>It's hard to say for sure, but odds are the debt ceiling charade drove the sudden plunge in confidence. Even if everyone thinks the ceiling will eventually be raised, witnessing this much dysfunction in Washington does a number on confidence. </i>

    Maybe it's the fact that people <i>do believe</i> that the ceiling will eventually be raised that does a number on confidence...

  • Report this Comment On July 20, 2011, at 8:50 PM, awallejr wrote:

    @ MrChapel

    As an aside I have seen this comment made elsewhere by others. The United States is a Republic, but Congress operates on a democratic process which I was cleary referring to. And it is this process that Republicans are using to create deadlock.

    You and I are in no position to dispute the warnings of those truly in the know that we will suffer serious harm should the debt ceiling not be raised come August 2. It is absolute irresponsibility to even threaten that event, which the Republicans are by refusing to compromise in working out a meaningful attempt at reducing the debt. As I said how do you negotiate with someone when they always say no.

    This country is still trying to recover from one of the greatest recessions in history and we are now being threatened with another one by a totally avoidable event.

    I agree spending needs to be drawn in. I agree there is now over regulation which Congress loves to do after any calamity in order to show everyone they did something. I think taxes need to be reduced in certain areas that involve small to mid cap companies especially since they create the jobs in the end. I have no problem with getting rid of certain deductions that benefit a small segment of wealthy people. But mention that and the Republicans walk away. So now the little guy could get screwed further come Armageddon day because the Republicans don't want to see a bunch of millionaire/bilionaire tax rates going up even a few percentage points?

    I guarantee you that most people on the planet would love to be paying a million dollars in income tax because that would mean they were earning probably $4 million.

    And while I think regulation needs to be pruned, I do want to see greater policing of Wall Street. Congress never should have repealed Glass-Steagall in 1999 and let those Wall Street guys into the mortgage business.

    While not shocked, I am angered at the Republicans for playing this game of brinksmanship and using the democratic process by deadlocking the system and thereby knowingly gambling on throwing the country back in to a recession that will harm so many people..

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