In May, it looked like the recovery had legs. Consumer confidence hit a level not seen since early 2008. All of the April data coming in was pretty good, with jobs growing steadily, up to about 300,000 that month. Home sales soared with Americans rushing to use the buyer credit before it expired. But when June hit that all changed. What happened?
The Home Buyer Credit
Something went wrong in June that caused consumers to doubt that a brisk recovery would persist. Consumer confidence fell off a cliff -- but why? There was likely more than one reason, but it sure looks like the demand distortion created by the home buyer credit had something to do with it.
Check out this chart:
It shows pending home sales (blue) -- those where a contract was started -- and consumer confidence (red). For much of the chart, it looks like the movement in pending home sales leads consumer confidence by about a month. In other words, in the month following the pending sales, it looks like consumer confidence is reacting accordingly.
For example, sales soared through April, and so did consumer confidence through May. In May, however, sales fell off a cliff. When they were reported a month later, consumer confidence followed. Even the subsequent monthly ticks up and down for pending sales appear to pretty closely lead consumer confidence.
And what happened in May that killed pending sales? That's easy: the home buyer credit was gone. It pulled forward several months of demand to make sales look better than they should have. As a result, in May through at least August, sales would look worse than they probably would have been -- if people hadn't rushed to buy a home and take advantage of the credit.
Without the credit, the housing market would likely have hit its bottom more quickly, probably in 2009. Then, any additional increase in sales would be the part of a gradual, lasting recovery. Instead, consumers see that the housing market looks very weak again, begin to worry, and lose confidence.
Of course, the housing market isn't the only factor that consumer confidence relies on. Another big one is unemployment. In fact, in May (which was reported in June) the private sector began hiring fewer new workers, as the jobs added dropped to 51,000 from 241,000 in April. What sector led the decline? Construction lost about 30,000 jobs, after adding around 25,000 in each of the prior two months. That makes a big difference. If May had kept pace with construction jobs in March and April, the headline jobs number would have been 55,000 higher at 106,000, which certainly looks a lot better than 51,000. So the drastic drop in construction jobs due to the expiration of the credit also likely added to weaker consumer sentiment.
But that's not the whole story of why jobs likely fell. Other industries also hired fewer works in May than in April. What else happened? The only other very significant negative economic news was the Greek and broader European sovereign debt problems. Most of that bad news hit in April. Obviously, it didn't affect average Americans much, as consumer confidence remained high through May. Business, however, likely took note.
As firms worried that a global slowdown could affect the U.S., they probably slowed their hiring. Once Europe stabilized, the news of the sour housing market began to surface, and they didn't resume their more aggressive job growth. This kept the private sector from adding additional jobs, which, in turn, choked consumer sentiment. Of course, the enormous Census job losses skewing the data further also didn't help matters.
Only Patience Heals
Due to these influences on consumer confidence, the U.S. economic recovery stalled. And it continues to improve at a crawl because housing and the labor markets continue to struggle. Unfortunately, now we're in a phase of recovery where poor consumer confidence appears to be self-fulfilling. Americans are convinced that the recovery is virtually non-existent, so they remain fearful. That, in turn, makes firms think there's little demand, and they keep hiring to a minimum. That further perpetuates long-term unemployment, and the vicious cycle continues.
Only time can get the U.S. out of its funk. The buyer credit hangover needs to subside and consistent positive headline job growth needs to resume. Since neither of those factors will likely change until the latter part of 2010 at best, it's unlikely we'll see a whole lot of economic progress for the rest of the year as the American consumer remains nervous.
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