Investment Contrarians

Potential Economic Threat: American Pessimism Grows as Politicians Bicker

By for Investment Contrarians |

010213_IC_cekerevacOne of the most difficult concepts for both retail and professional investors and analysts is the incorporation of transitory or one-time events into information regarding economic growth and job creation.

What do I mean? There are many moving parts in the economy. Not all data can be compared on an equivalent basis. Even year-over-year data comparisons should incorporate far more variables.

As an example, recent data on both economic growth and job creation over the past six months have confused many professionals due to the many uncertainties affecting consumers and businesses.

We had the election, the fiscal cliff debate, and heated arguments by politicians on major structural issues, all of which created confusion with the data.

For the last six months, we have constantly heard from businesses that they were worried about the impact of the fiscal cliff. Many stated they were reluctant to expand their business; this sentiment can lead to a lower level of job creation, which would affect economic growth.

Is it reasonable to compare this latest set of data to the previous year’s data? What about the year before that? Clearly, the last six months were far different than the same time period last year. And since we can’t reasonably calculate how an individual or business would have acted without these uncertainties being present, data must be interpreted much more cautiously.

An example of interpreting behind the data is the recent release by The Conference Board of its Consumer Confidence Index for January, which declined to 58.6 from 66.7 in December. This was far lower than the median forecast in a Bloomberg survey of 64.0. January’s data set was also the weakest since November of 2011. (Source: Smialek, J., “Consumer Confidence in U.S. Falls to Lowest Level Since 2011,” Bloomberg, January 29, 2013.)

This decline is significant as economic growth is predicated upon strong consumer confidence. The moribund level of job creation in combination with the increase in taxes for the majority of Americans clearly affected consumers.

However, one data point is certainly not enough to call a trend. Was this lowered data point a culmination of seeing the first paycheck with higher taxes and confusion regarding the budget debt ceiling talks as opposed to pessimism purely on economic growth? It’s difficult to tell with just one data point.

While President Obama discussed at length how he will be taxing the rich, the realization that the expiration of the payroll tax cut is actually affecting approximately three out of every four Americans is now making an impact.

The Consumer Confidence Index also showed that a large number of people are expecting job creation to become more difficult to achieve in the future. Being pessimistic about job creation is clearly a negative for economic growth.

The decline in consumer confidence is an indication that higher taxes do make a significant negative impact. At this point, we do not know if this tax hike will depress economic growth for the remainder of the year or if the decrease in confidence is temporary.

The interesting comparison is that during this time period, various asset classes, including home prices and stocks, have continued to rise. We also had a minor increase in job creation, though the numbers are still extremely weak.

To me, the variables that had the biggest impact on decreasing consumer confidence were the increase in taxes on most Americans and the continued political debates, now moving on from the much-discussed fiscal cliff toward the budget ceiling.

For economic growth to resume at an above-average pace, we need to see consumer confidence increase in step with job creation. Increasing taxes and the ineptitude of politicians to make difficult yet much-needed structural reforms continue to weigh down economic growth.

While it’s easy to make a quick conclusion from a headline data point, one needs to spend additional time in understanding the full context.

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