CEOs vs. Consumers

CEOs and consumers aren’t seeing the same economy at the moment. Consumer confidence jumped to a five-year high following October’s misleadingly good jobs report. The good feelings went up across the board, and consumers were suddenly optimistic about the present and future. And, with it, suddenly not too concerned about inflation or the job market.

Inflation concerns actually went down 0.2%, despite persistently high food and gas prices, and a 0.6% rise in consumer prices in September. Confidence in future income prospects went up, despite a 0.3% drop in real disposable income in August. Even with less pocket change, consumers still upped retail spending the next month, spending an extra 1.1% on consumer goods. Combined with higher confidence, Capital Economics noted that, “taken on face value, this suggests that annualized consumption growth could reach 4% in the fourth quarter.”

None of which even mentions the misplaced encouragement from the unemployment drop. September’s headline employment gain was inflated by an unbelievable 873,000-employment gain in the household survey. In fact, private payrolls have been hovering around the 121k per month level, a rate consistent with a stagnant unemployment rate, not a dramatic drop. But all consumers saw was the drop.

CEOs haven’t been nearly optimistic. The day before October’s bombshell jobs report was released, the Conference Board a less noticed measure of executive confidence in the economy for the third quarter. It wasn’t pretty. The headline confidence index fell five points to 42. The percentage of CEOs seeing improvement right now dropped from 17% to 9%. Consumers’ take on current conditions rose 2.9%. And while six-month expectations rose 6.0 points for consumers to a recovery high, the percentage of CEOs who thought the same fell from 20% to 12%. Almost a third noted they’ve already scaled back investments since January 2012.

 

The bad news out of earnings season only reinforces CEO pessimism. Dow Chemicals will have to cut 2,400 jobs due to slowing global demand. Sales slid 10% in the third quarter. Cummins expects to lay off between 1,000 and 1,500, and lowered its revenue outlook for the remainder of 2012. DuPont is letting go of about 2% of its workforce – about 1,500 employees – to offset soft demand.

Concerns about the fiscal cliff aren’t weighing down consumers, but they are worrying CEOs. Businesses are delaying business investments until some kind of resolution is agreed to. Not to mention mediocre manufacturing figures and poor durable goods orders, the latter back down to a recessionary lows — which was a drag on Q3 GDP growth.

After reviewing the manufacturing, durable goods, labor and CEO confidence reports, I wouldn’t be surprised to see a sizeable drop in new hiring in the coming months — with negative ramifications for both the economy and the stock market.