US economy: Consumer confidence near record highs may signal recession

Consumer
confidence has some economists on recession
watch.
Jamie
McDonald/Getty

• US
  consumer confidence is at its strongest level since 2000,
  according to the Conference Board’s most recent survey. 
• Such peaks in confidence have preceded previous recessions,
  and some market watchers are worried about what happens this
  time. 
• There’s no “magic” peak that confidence must hit before it
  starts rolling over, so it’s possible that consumers haven’t yet
  experienced the best of this economic cycle.

Americans haven’t felt this good about the US economy since
2000. 

That’s what the
Conference Board’s latest report on consumer confidence
found. The September index released on Tuesday jumped to
138.4, “not far from the all-time high of 144.7 reached in 2000,”
the research group said. 

It was an encouraging sign of where the economy stands 10 years
after
the Great Recession. President Donald Trump even gloated
about it on
Twitter as “a big jump from last 8 years” even though it has
been trending higher. 

But because what goes up eventually comes down, some economists
and strategists are worried that this level of consumer
confidence
portends a downturn. 

One of them is David
Rosenberg, Gluskin Sheff’s chief economist and an
outspoken handwringer
on what could go wrong with markets and the economy. 

Rosenberg specifically flagged the link between exuberance on
Wall Street and Main Street.

As market cycles go, euphoria marks the peak before the big
tumble. And with the stock market and consumer confidence
hovering near all-time highs, Rosenberg is concerned. About 43%
of the Conference Board’s survey respondents said they were
bullish on stocks, nearly double the 22.4% share of bears.

“To show how the Conference Board consumer confidence survey has
become nothing more than a poster child for stock market
sentiment over time, their correlation has soared to 81% in the
past decade,” he said.
“The correlation over the last 4 decades is only 51%. 

John
Hussman, the president of Hussman Investment Trust who
Business Insider has described as the stock market’s biggest
bear, flagged this concern even before the new
consumer-confidence print for September. 

“There’s most likely a feedback [loop] here — the strong
performance of the market may help to boost consumer confidence,
and strong consumer confidence may help to support the market,”
Hussman said in a September 3 post.

“The feedback may be self-reinforcing over short periods,
but mean-reversion clearly dominates over the economic cycle, as
investors fluctuate between extremes of optimism and extremes of
pessimism.” This, combined with what Hussman
describes as unfavorable market internals, have opened a
“trap
door below the market.”

Albert
Edwards, the ever-bearish strategist at Societe Generale,
also wrote about “extreme optimism” in his client note on
Wednesday. 

“The US consumer has gorged on optimism until they are fit to
burst,” Edwards said. “This is as good a contrary indicator as
technical indicators such as put/call ratios.” These show
the relative bets that options traders are making on higher or
lower stock prices, and can indicate when buying or selling are
at extremes.

There’s no magic level

Rosenberg observed that a recession began seven months after
confidence peaked in 2000.

So, is another recession coming? There’s no magic level of
confidence that answers that question, according to Neil Dutta,
the head of economics at Renaissance Macro. 

“If there was a magic level, we would [see] recessions start
around those points,” he wrote on the chart below. “Instead,
recessions start a [sic] different levels of confidence.”

What the chart also shows is that confidence usually peaks before
recessions. That makes intuitive sense: the economy eventually
gets worse after it’s been very good, which is why an 18-year
high on consumer confidence is startling the recession watchers
once again. 

The more difficult question is how much higher confidence can
climb before it peaks ahead of the next, inevitable recession.

Recessionary periods are
shaded in blue.
Renaissance
Macro

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