American consumer confidence continues to drop, as does the value of their houses.
The general state of the economy and gloom employment prospects caused the Consumer Confidence Index™ to drop to its lowest since its creation in 1967, reveals the Conference Board, an economic research institute.
Having dropped to 38.8 points in October, on a scale where 100 corresponds to the level in 1985, the indicator had risen, to the great surprise of the analysts, to 44.9 points last month, thanks to the strong decrease of the gas price and the wind of hope lifted by Barack Obama's presidential election.
This time, the experts were expecting the consumers' mood to remain more or less the same. They were mistaken again, as the index fell to 38 points in December, even lower than it was at the worst of the stock exchange crisis in October.
"The further erosion of the Consumer Confidence Index™ reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008," Lynn Franco, Director of The Conference Board Consumer Research Center, said. The survey was completed on Dec. 22 and 5000 people participated.
The depression of those who are responsible for more than 70 percent of the American economic activity is caused not only by the current economic situation but also the prospect it offers for the next months.
The Present Situation Index dropped from 42.3 points in November to 29.4 points in December, close to levels last seen in the months following the 1990-91 recession, but not as low as levels reached during the 1981-82 recession, the Conference Board noted, and the unemployment rate was at 9.7 percent compared to the current 6.7 percent.
The Expectations Index declined from 46.2 points in November to 43.8 this month. This is explained by the fact that the proportion of consumers who expect a degradation of the economy in the next 6 months increased from 28.3 to 32.8 percent, while those who expect the situation to get better decreased from 13.4 to 11.5 percent. The amount of people who fear an increase in unemployment has risen this last month going from 33.7 to 42 percent, while less than 10 percent think the opposite.
"This loss of confidence is discouraging because it proves that the decrease of the price of fuel hasn't managed to balance the negative feeling inspired by the ongoing weakness of the job and housing markets," Paul Ferley, a Royal Bank economist, said.
This "abyssal confidence level" leads to a prediction of a decrease in economic growth for the fourth quarter which will bring the annual rate of economic decrease to 6.1 percent.
And the property prices fall
It must be said that the American consumers have good reason to fear. It's true that the general price level dropped by 1.7 percent in November, something unseen since 1947, and work revenue continues to progress (+2.3 percent for real average weekly wages in November). On the other side, the unemployment rate, at 6.7 percent, is already at its highest level for the decade, and economists predict that it could rise to 8 percent, or even 10 percent, during 2009. And that's not considering the state of the real-estate market.
However, the price of houses plummeted by 18 percent in one year in October in the United States, according to the most recent measurement of the S&P/Case-Shiller index revealed yesterday.
"October led to a free-fall," said David Blitzer, one of those responsible for the survey of the real-estate markets in 20 of the largest American urban areas. "The prices of houses dropped to the level of 2004", he added.
Such a decline hadn't been seen since the creation of the index 21 years ago in at least 14 of the 20 urban areas studied. The worst price decreases were observed in Phoenix, Las Vegas, San Fransisco or Miami, where houses lost near one third of their value in 12 months. The 20 urban areas suffered an average decrease of 25 percent compared to the peak attained in mid-2006.
"And it's very unlikely we have reached the bottom of the barrel", Joshua Shapiro warned, an economist at MFR, New York's consulting firm.
Not unlike the egg and the hen, this degradation of the real-estate market does nothing to reassure American households; now their gloom only contributes to increase the drop in house prices. "If you think you are going to lose your job, you don't buy a house," reminded Steven Ricchiuto, an economist for Mizuho Securities.
Catastrophic holiday season
Businesses are also bitterly affected by the situation. End of year sales season will be catastrophic, with a drop in American store chains annual sales by 1.8 percent over Christmas only. The international mall Council predicts a decrease by 1 percent in December, after a record decrease by 2.7 percent in November.
Store owners have understood that times will remain very difficult over the next months, as reported by another study yesterday by Standard & Poor's. The evaluation agency predicts that consumers will continue to stay away from stores in 2009 and notices that the distribution sector in the United States has already reduced its stocks accordingly. However, it is predicted that businesses such as Walmart, Target and other discounters will manage to do better "thanks to a good price positioning and the focus on basic and common consumption goods."
All this new data only contributes to underline the "urgency for a resolute political action to bail out the economy", Brian Bethunes, from HS Global Insight commented yesterday. No one can wait for the $700 to $800 billion economic revival plan that is thought to be announced by the American President Barack Obama after he takes office at the end of next month.