Recession, Inflation and IBD Survey
Investor’s Business Daily (IBD) has a long term track record of forecasting and analyzing markets, the economy and consumer attitudes. Following is an excerpt and distillation from IBD’s recent September poll data. The complete IBD/TIPP Economic Optimism Index most recent report can be found by clicking on the hyperlink. The recent September report provides an insight into recession, inflation and the IBD Survey. For anaylis and opinion by mywinningmortgage.com, posts can be found here, here and here. These posts analyze the potential effect on mortgage rates, housing prices and other economic concerns. Pick up a copy of Winning Mortgage, Winning Home to bring common sense into your mortgage.
In addition to the recap of the IBD survey below, another blue chip firm measuring the financial market released a stunning study. The deposits to loans ratio measures whether a bank has good loan demand and the availability fo deposits. Since the start of the pandemic and the flood of government printing began, deposits at banks outstrip any demand. In fact, the deposit level reached 172% of loans, an all-time high. This means there too much surplus money chasing too few homes, investments and other goods. Hence, look for continuing increases in inflation, perhaps rapid increases. The public noticed the inflation.
Economic Confidence Collapses As A Flood Of Negatives Predicts A Bad Patch
The Investor’s Business Daily (IBD)/TIPP Economic Optimism Index reflects a leading measure of consumer confidence. It declined nearly 10%, from 53.6 in August to 48.5 in September. The index entered the negative territory in September (above 50 is positive, below 50 is negative). Confidence in September is nearly 20% below its pre-pandemic level of 59.8 in February 2020.
The IBD/TIPP Economic Optimism Index is the first monthly measure of consumer confidence. It accurately predicts monthly changes in sentiment in other well-known surveys. Similar surveys come from The Conference Board and the University of Michigan. Consumer spending drives two-thirds of the economy. Optimistic consumers spend money on automobiles, home improvements, new homes, and other large-ticket items. The TIPP Economic Optimism Index is the most well-known of our TIPP indexes. Investor’s Business Daily publishes the IBD/TIPP economic optimism index every month.
Factors Contributing to the Collapse of Consumer Confidence
Multiple factors demonstrate the collapse of the index and its components, and a few of them:
- To begin, the current administration botched the Afghanistan withdrawal. This boosts concerns about increased terrorism from the middle east which spills over into economic matters as well.
- In August, the US economy added 235,000 jobs. Job growth fell a half-million less than expected by Wall Street. The slowdown in job creation is not encouraging.
- The stock market appears poised for a correction in the next sixty days as the Fed fine tunes its monetary policy.
- The real estate market moves toward cooling due to increased supply and less demand. The expiration of mortgage forbearance will also impact the market.
- Last but not least, macroeconomic factors weigh heavily. Unemployment, wage growth, inflation, money supply, and new taxes dim the outlook.
IBD/TIPP Economic Optimism Index
This flagship index has three equally weighted components. For the index and its components, a reading above 50.0 signals optimism. Below 50.0 indicates pessimism.
All three index components fell in September!
The Six-Month Economic Outlook, a measure of how consumers feel about the economy’s prospects in the next six months, declined by 17.7%. It dropped from 50.2 in August to 41.3 in September, a 12-month low.
The Personal Financial Outlook, a measure of how Americans feel about their finances in the next six months. This fell 4.8%, from 57.8 in August to 55.0 this month, also at the index’s 12-month low.
Confidence in Federal Economic Policies reflects a proprietary IBD/TIPP measure of views on how government economic policies are working. It declined 7.2% from 52.9 in August to 49.1 in September.
Investor Confidence
IBD/TIPP considers respondents to be “investors” if they currently have at least $10,000 invested in the stock market. This may be personally, with a spouse or in a retirement plan.
In August, the economic optimism gap between investors and non-investors was 17.3 points. This reached a record high in the 20-year history of the IBD/TIPP Economic Optimism Index. The gap shrank to 15.7 in September.
Momentum
Comparing a measure’s short-term average to its long-term average is one way to detect its underlying momentum. For example, if the 3-month average is higher than the 6-month average, the indicator is bullish. The same holds if the 6-month average exceeds the 12-month average.
In September, all three index readings were lower than their three-month moving averages. This indicates a slowdown. Furthermore, the three-month moving average for the three indexes now is lower than the six-month moving average. As a result, the data presents a convincing picture of a slowdown.
Inflation
Last month, the Bureau of Labor Statistics reported 12-month inflation, measured by CPI (Urban) (CPI-U), at 5.4 percent for the second straight month. These numbers reflect a 20-year high.
In the IBD/TIPP Poll, 82% worry about inflation. Price increases in energy, food, and groceries can cause consumers to cut back on spending.
Instability in the Mideast will not help oil prices. Global food prices increased 31% year over year in July. Also, the cost of shipping from Shanghai to LA increased from $3,392 to $11,362. That reflects a 235 percent increase in transportation cost.
Some think that inflation is likely to peak. But others believe that it will persist in the foreseeable future. The Federal Reserve believes long-run inflation of 2% supports its maximum employment and price stability mandate. The Fed has been purchasing $120 billion in government-backed bonds each month, which puts more money into the economy. The inflation data will be one of the critical inputs in the Fed’s decision whether to taper or stop its asset purchases. The Fed will meet on September 22 and 23.
Those who believe that the economy is improving dropped precipitously from 42% in August to 32% in September.
TechnoMetrica’s View
The risks on the downside outweigh those on the upside. Watch the real estate market, the stock market, the job market, and the Fed meeting on September 21-22 for indications. The real estate market is likely to cool down, and the stock market may undergo a correction over the next sixty days.
Inflation is here to stay for the foreseeable future. Whether wage growth will keep pace with inflation remains to be seen. If inflation intensifies, it could dampen economic confidence further. Instability in the Middle East could drive up energy prices.
The Fed may signal its intention to scale back its efforts to increase liquidity.