Although I have been focusing on the importance of the business sector in this recovery, we can never forget the consumer. Even with slower growth, consumer spending in the second quarter of 2010 accounted for 70.3% of total GDP. This is less than the 71.3% it accounted for in early 2009, but still a considerable and vitally important. This week, we learned that consumer confidence dipped in September to the lowest level since last February, not a positive omen for the economy.
The decline in confidence is certainly a concern, but there are reasons to believe is not as ominous to the economic outlook as the decline might suggest. The key is the difference between current and expected conditions. The chart shows the two main subcomponents of the University Of Michigan Index Of Consumer Sentiment since 2000. Current conditions reflect consumers’ answers to the “pocketbook” questions about current income compared to a year ago and other questions about the current financial condition of the household. The expectations index is derived from answers to questions about what consumers think about the future. So the current conditions index is based on hard experience while the expectations index is based on feelings about the future.
From 2004 through 2007 as the economy while the economy was strong, the current conditions index was stable at high levels while the expectations index was in a steady downtrend. Consumers were concerned but they kept spending. This year we are seeing a similar performance. Consumers are better off, but they are worried about the future. Fortunately, consumers spend based on their current conditions not their expectations. To be sure, the indexes are both at low levels suggesting consumer spending is not about to boom. But I suspect it is not about to collapse wither. Instead, we will get steady, if unspectacular growth in consumer spending.
That’s a positive for the real estate industry because rising demand will lead to higher employment as businesses cut so much during the recession that even modest increases in demand are causing hiring to occur. Continuing demand growth will boost hiring and by extension the demand for real estate.