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  • McKinsey: Growing Confidence Among Consumers in China

    Retailers in the US are relying on consumers spending and spending for the holidays, but the consumers that truly matter in the global economy are in China. The Chinese government has set consumption as a priority. This will require that Chinese consumers have more money and are confident in their family's economic situation. According to McKinsey's 2011 Annual Chinese Consumer Study , these conditions have been met. Take a look at the rise in confidence among Chinese consumers: The authors point out that spending will almost certainly rise along with that confidence. But sustained growth in consumption will depend more and more on Chinese consumers buying goods to replace products that they have bought in the past. This is behavior that we take for granted among consumers in developed economies like the US and Japan. But it is new ground in a lot of product sectors in China: A few categories, in particular big-ticket items such as cars, have significant growth potential through first-time buying. For example, China is the world’s largest auto market, with 11.7 million passenger cars sold in 2010 compared with 9.8 million in the United States. But the total number of cars sold per capita is 13 times smaller than in the United States, and most car buyers in China are still first-time buyers. Personal computers constitute another category still ripe for strong growth from first-time buyers. Ownership has risen sharply from 25 percent of urban households in 2006 to 44 percent today with much room for additional growth from new users. In poorer rural areas, only ten personal computers are shared among 100 households. As incomes continue to rise in China, and as the government’s consumption-boosting measures kick in, more and more people will be able to afford such items. For many categories that have been in China for more than ten years, however, and are widely affordable albeit at different price points, the headroom for growth from first-time buyers is limited. With the exception of very big-ticket and luxury items, as well as products that are relatively new to the Chinese such as breakfast cereals, many of the largest categories such as white goods, personal care, food and beverages, and apparel have now reached penetration levels of well over 50 percent of the urban population. This means that some categories may see falling growth rates. National sales of mobile handsets, for example, grew at around 7 percent a year between 2006 and 2010, compared with 21 percent during the previous five years, a reflection of the fact that 97 percent of urban households now own a mobile phone. In such cases, an essential component of capturing rising spending power will be to persuade consumers to buy more of the same thing—either by making more frequent purchases or buying in greater quantities—or to trade up to more expensive products in the same category. Refrigerators and washing machines serve as an example. Although over 90 percent of urban dwellers now own these items, the survey shows that the average time they keep either item before replacing it has dropped in the past two years from around seven years to six. In addition, the average amount spent has risen by 9 percent for refrigerators and 15 percent for washing machines. The survey again highlights how the importance of these other drivers of category growth differs both by category and region. Read the full report here .

  • Boston Fed: The Relationship Between the Housing Crash and Confidence in Real Estate and the Economy

    In a new paper for the Center for Behavioral Economics Federal Reserve Bank of Boston , economists Anat Bracha and Julian C. Jamison , explore how the housing crisis and the Great Recession have affected Americans' attitudes toward home ownership. They sifted through recent Michigan Survey of Consumers data, and found that direct experience matters quite a bit: Our main results are as follows. People who lived (in 2008) in ZIP codes that were hardest hit by the crash in housing prices, as compared to those in areas that were least severely affected, are significantly more likely to be confident about owning a home if they are older (above 58 in our sample) but are significantly less likely to be confident about owning a home if they are younger. These results control for demographics, current absolute house price levels, and other factors, but importantly they are concentrated in the approximately one‐third of our sample who report that either they or someone close to them actually lost a large amount of money in real estate during the crisis. We argue that the latter result implies that mere information is not enough, and instead something like hands‐on experience is required to change confidence in home ownership. This is because presumably almost everyone was exposed to multiple media headlines about what had happened in their neighborhood and around the country, and yet they do not show a similar divergence in confidence. In terms of the striking age differential, one possibility is that relatively younger respondents were indeed more malleable, and hence they internalized the sharp drop as a regime change. In the new perceived regime, housing is an insecure investment and thus (relatively) to be eschewed. Available evidence from economics and psychology further suggests that such a change is likely to be persistent. On the other hand, older respondents – whose models of the world are harder to alter – see the drop in house prices as a temporary dip in a stable long‐term upward trend, making it a particularly good time to purchase. Of course it is also possible that older consumers buy homes more for consumption and less for investment, although the wording of the question was explicitly designed to hone in on general beliefs and away from individual circumstances. In their research, Bracha and Jamison also found that despite all the losses in real estate over the last four years, few Americans see renting as a desirable option: Read Shifting Confidence in Home Ownership: The Great Recession here . (Hat tip Binyamin Applebaum, NYT )

  • The IMF Growth Tracker Showing Moderating Growth Across Global Economy

    The IMF's World Economic Outlook shows a worrying global economic slowdown, led by Europe and the US. Among the many causes cited for slowing economic activity is the lack of demand in the private sector. The IMF's researchers suggest that they expected a quicker "handover from public to private demand." The tsunami and earthquake damage in Japan also bears some of the blame, as do disruption in oil supplies in North Africa this year. A lasting, and troubling factor is the lack of confidence on the part of consumers and businesses in developed economies of the West. The ripple effects of the dip in confidence are being felt around the globe. Note the impact on growth, as shown in the IMF's Growth Tracker : From the report: Worryingly, various consumer and business confidence indicators in advanced economies have retreated sharply, rather than strengthened as might have been expected in the presence of mostly temporary shocks that are unwinding. Accordingly, the IMF’s Growth Tracker (Figure 1.4, top panel) points to low growth over the near term. WEO projections assume that policymakers keep their commitments and the financial turmoil does not run beyond their control, allowing confidence to return as conditions stabilize. The return to stronger activity in advanced economies will then be delayed rather than derailed by the turmoil. Read the World Economic Outlook, and watch video of the IMF staff discussing their findings, here .

  • NY Fed President on US Economic Outlook

    William Dudley , President of the Federal Bank of New York , spoke earlier today at New York University's Stern School of Business, and he gave a measured, somewhat positive prognosis of the US economy. While he said that there are mixed signals coming from the employment data, there is some good news in the data on consumer spending, productivity, and consumer and business confidence. On the activity side, a wide range of indicators show a broadening and strengthening of demand and production. For example, on the demand side, real personal consumption expenditures rose at a 4.1 percent annual rate during the fourth quarter. This compares with only a 2.2 percent annual rate during the first three quarters of 2010. Orders and production are following suit. For example, the Institute of Supply Management index of new orders for manufacturers climbed to 67.8 in January, the highest level since January of 2004. The revival in activity, in turn, has been accompanied by improving consumer and business confidence. For example, the University of Michigan consumer sentiment index rose to 77.5 in February, up from 68.9 six months earlier. Indeed, the 2.8 percent annualized growth rate of real gross domestic product (GDP) in the fourth quarter may understate the economy's forward momentum. That is because real GDP growth in the quarter was held back by a sharp slowing in the pace of inventory accumulation. The revival in demand, production and confidence strongly suggests that we may be much closer to establishing a virtuous circle in which rising demand generates more rapid income and employment growth, which in turn bolsters confidence and leads to further increases in spending. The only major missing piece of the puzzle is the absence of strong payroll employment growth. We will need to see sustained strong employment growth in order to be certain that this virtuous circle has become firmly established. So, there's the good news. But Dudley was careful to caution against premature optimism. And he while he outlined the dangers of low-interest rates, and the chance they might "foster a buildup of financial excesses or bubbles that might pose a medium-term risk to both full employment and price stability," he also explained that the Fed does have tools to avert crisis: To summarize the main points, we have a considerable amount of slack, little evidence of discontinuous speed limit effects, and little inflation pass-through from commodities into core inflation when inflation expectations are well-anchored, which is currently the case. This suggests that the biggest risk in terms of higher underlying inflation over the next year or two is that inflation expectations could become unanchored. This might occur, for example, if there were a loss of confidence in the ability and/or willingness of the Federal Reserve to tighten monetary policy in a timely way in order to keep inflation in check. In this regard, the proof of the pudding will be in our actions—talk is cheap. What is key—that the appropriate policy steps are taken in a timely manner. Read Dudley's Prospects for the Economy and Monetary Policy here .

  • Economic Letter: 'Confidence and the Business Cycle'

    The latest Economic Letter from the Federal Reserve Board of San Francisco Sylvain Leduc , a research advisor at the San Francisco Fed, takes a look at the influence of business and consumer confidence on the ups and downs of the business cycle. Leduc finds that consumer and business "sentiment" have "contribute[d] significantly" to fluctuations in the business cycle. But he also points out that any examination of the influence of consumer sentiment can't exclude the impact of confidence on monetary policy: Periods of the kind of strong confidence that drives economic booms have repeatedly generated criticisms that monetary policy fueled excessive levels of optimism by keeping policy overly accommodative. For instance, theoretical work by Christiano, Motto, and Rostagno (2006) suggests that central banks that focus heavily on inflation may end up stoking confidence-driven booms. In their model, expectations that good times are ahead lead to upward pressure on real wages as the demand for labor increases. If nominal wages adjust slowly, pressures develop for prices and the inflation rate to fall. As inflation declines below their target rate, policymakers respond by lowering interest rates. In this way, they end up fueling the boom. The evidence presented in panel C of Figure 1 suggests instead that historically, following an increase in confidence, monetary policy becomes more restrictive as the short-term policy interest rate rises. Monetary policy attempts to damp the boom by leaning against the rise in economic activity and inflation generated by rising expectations. Similarly, a wave of pessimism translates into a more accommodative monetary stance, as the economy weakens and inflation declines. Read Confidence and the Business Cycle here .

  • WSJ's Arends, Murray Discuss Potential for Consumer Spending to Rebound

    The recession may have ended in the middle of 2009, but consumer spending did not come back. In fact, Sara Murray reported this week in the Wall Street Journal , " middle-class Americans made their deepest spending cuts in more than two decades." Here's a look at how spending habits changed during the recession ( click here to read Murray's article): But there are signs out there that spending may pick up again. Murray and Wall Street Journal Columnist Brett Arends discussed signs of coming consumer spending in the latest NewsHub:

  • eMarketer: 'New Normal' in Consumer Behavior

    Lisa Phillips , Senior Analyst at eMarketer.com , writes that most American consumers are highly skeptical that recovery is here, or will start anytime soon. And she shares this chart on that sentiment: And that means, Phillips writes, that marketers are going to have to accept a "new normal": To cope, consumers are resetting their spending behaviors and focusing on value, according to NPD Group’s “Retail & Brand Landscape Report Series 2010” study. For example, they shop at more stores but realize they can leave without buying something. They have also widened their brand considerations, MediaPost reported. For 81% of the participants in Deloitte’s “American Pantry Survey,” however, their new-found use of coupons and loyalty programs is fun—and 93% said they still expected to spend cautiously even if the economy improved. Even as they expect to spend less, consumers are shopping more online. Some 55% of respondents to a PriceGrabber.com survey said they were spending more time shopping for and researching purchases on the internet this year, compared with 26% in 2009. Read The ‘New Normal’ in Consumer Shopping Behavior here .

  • Black Friday Stats and Consumer Confidence

    Black Friday is always a day ripe for hype and wide-though predictable-television coverage. But the last two Black Fridays seem to have attracted even more speculation, and anxiety, than usual. So it is impossible to resist looking at some of the numbers that are coming through today. The takeaway seems to be that there were more people shopping this Black Friday than last year, but they spent less. So the overall take by retailers was higher, but not by much. Andrea Chang shares some of the key stats in today's LA Times : Sales on the day after Thanksgiving rose just 0.5% to $10.66 billion, according to ShopperTrak RCT Corp., a research firm that monitors sales at more than 50,000 stores. That compared with a 3% year-over-year Black Friday increase in 2008 and an 8.3% surge in 2007. "It's a positive sign that we had an increase in sales, but the numbers certainly don't indicate that those will be sustained," said Britt Beemer, chairman of consumer behavior firm America's Research Group. Nationwide, 195 million shoppers visited stores and websites over the four-day weekend, up from 172 million last year, the National Retail Federation said Sunday. But average spending fell 7.9%, to $343.31 per person, from $372.57 a year ago. Total spending reached an estimated $41.2 billion. The resistance to making big purchases is no surprise to the folks at The Big Picture , where, before any Friday stats came out, David Rosenberg shared the below chart and stressed that consumer frugality is alive and well: Rosenberg writes: The Conference Board’s consumer confidence index may have improved (48.7 in October to 49.5 in November) and beaten consensus expectations, but it remains firmly in recession terrain. It is so obvious that consumers are tired of the over-borrowing and over-spending days of yesteryear. Despite all the temptations provided by the government, auto buying plans dropped to an eight-month low (from 4.7 in October to 4.4 in November); home buying plans slipped to a new 27-year low of 2.3 (from 2.5 in October and 3.0 in September); and intentions to buy a major appliance stayed at a 14-year low (23.2). Read Consumer Confidence in the Doldrums here .

  • Conference Board Consumer Confidence Index Reaches Highest Level Since September

    If the Case-Shiller Index has you feeling down (like home prices), the Conference Board's Consumer Confidence Index might give you reason to feel a bit better. It seems to have picked up the spirits of the markets. The index is now at 54.9. That's up from 40.8 in April. Lynn Franco is the director of the Conference Board's Consumer Research Center, and she puts this number in context: After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4). Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first. Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us. Read the Conference Board's release here .