SHI Update 12/28/16: Confidence Reigns!

2017 rapidly approaches and the US consumer is feeling quite optimistic!

According to surveys by both the University of Michigan and the Conference Board, confidence is UP. In fact, consumers are feeling as spry as they did back in 2001:

Does consumer confidence matter?  What impact might it have on the US economy?  We will dig into this meaty topic!  Welcome to this week’s Steak House Index (SHI) update.

As always, if you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/)

Why You Should Care:   The US economy and US dollar are the foundation of global economics:  our nominal GDP is over $18.5 trillion a year.  Is it growing or shrinking?   Is it possible to know – before the quarterly GDP releases from the BEA?

The objective of the SHI is simple:  To predict the direction of this behemoth ahead of official economic releases.   But while the objective is simple, the task is not.

BEA publishes GDP figures the instant they’re available. Unfortunately, it is a trailing index. The data is old news; it’s a lagging indicator.

‘Personal consumption expenditures,’ or PCE, is the single largest component of the GDP.  In fact, the majority of all GDP increases (or declines) usually result from (increases or decreases in) consumer spending.  Thus, this is clearly an important metric to track.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been.  Thereby giving us the ability to take action early.  Not when it’s too late.

Taking action:  Keep up with this weekly BLOG update.  If the SHI index moves appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:  Take another look at the graphic above.  First, notice the general direction of the graph lines – from a low in the 40s back in 2008/2009 to over 100 today.

And notice Bloomberg asks are “Brighter days ahead?”  Great question.

Consumer confidence affects consumption behavior.  When we are fearful, we tend to be more risk averse.  We save.  Fear restricts spending.  Confidence, on the other hand, promotes consumer spending.

From the Conference Board:

“Consumer Confidence Index^®, which had increased considerably in November, posted another gain in December. The Index now stands at 113.7 (1985=100), up from 109.4 in November. The Expectations Index increased sharply from 94.4 to 105.5.”

Per Lynn Franco, Director of Economic Indicators at The Conference Board:  “The post-election surge in optimism for the economy, jobs and income prospects, as well as for stock prices which reached a 13-year high, was most pronounced among older consumers.”

Consumer confidence can also impact corporate behavior.

You’ll recall a large GDP component is “Gross Private Domestic Investment” or GPDI.     This metric provides a productive capacity ‘indicator’ for our economy.   In a nutshell, GPDI encompasses purchases to replace equipment, plus net capital expenditures, plus inventory investment:

In some respects, GPDI represents ‘corporate spending.’  And we can see from the graph above, it has been pretty flat – even somewhat negative – in the past two years. Which is one of the reasons US GDP readings have remained fairly muted.

But that’s likely to change if consumer confidence remains at current levels.  After all, corporate investment tends to grow when companies expect consumers to buy their products in years to come.

And, of course, as we all know, steak houses are cooking up steaks!   I don’t know about you, but I’m really curious to see if dinner reservations in our high-dollar “fabulous 4” have keep up their pre-Christmas pace.   What do you think?  Can the SHI match – or even exceed – the high-water mark of 57 from last week?

Almost!  The SHI algorithm shows this Saturday – New Year’s Eve – is almost as popular as Christmas Eve.

Throw caution to the wind!  Saturday night is your final 2016 opportunity to consume large, expensive, calorie-laden, artery-clogging steaks!  And all the fixins!

But you won’t be doing it at either Mastro’s or Ruth’s Chris.  They’re booked:

And for the first time ever – <gasp!> – reservations at the Capital Grille have surpassed Mortons!   A certifiable Christmas miracle!  🙂

Well, perhaps not a miracle…but I never thought I’d see this day.  Did you?   Here’s the long-term trend report:

It appears “seasonality” has impacted our prior two SHI readings – perhaps all of December.  That Christmas and New Year’s Eves both fell on Saturday evenings this year certainly looks to have created aberrational demand for high-dollar steaks.  Makes sense.

But remember:  The SHI algorithm is designed to reflect consumer choice and behavior.   If consumers were fearful of the future, seasonality would not – in itself – drive consumer demand this deep.   No, there must still be strong underlying and fundamental belief in the strength and durability of our economy.   The “consumer confidence” readings we discuss above tell us the same story.  The consumer is confident … and the consumer is spending money.

Let me summarize with these comments:  Yes, I believe there’s a great chance the US economy will have “brighter days” ahead.  Indications continue to suggest 2017 will generate slightly higher GDP numbers, higher corporate profits, and an overall healthier US economy.  There is no recession (or economic slow down) in sight.

But I also see “storm clouds” forming on the horizon.   No, I’m not suggesting problems will arise … but they might.   We need to understand them … and be understand their potential impact on our economy.  I’ll cover “storm clouds” in more detail in my next BLOG.   Be sure to register for email updates – you won’t want to miss this!

• Terry Liebman