‘Steak House Index’ Update – July 20, 2016

It’s Wednesday, so it’s SHI time!  Let’s jump into today’s analysis.

And, as always, if you need a quick refresher, take a look at 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 Department of Commerce ‘Bureau of Economic Analysis’ publishes the most recent GDP figures the instant they’re available.

And, as we’ve discussed previously, the vast majority of GDP growth – or declines – are related to consumer spending.  Remember:  The latest GDP figure released on May 27th was $18.2 trillion.   Consumer spending, known as the ‘PCE’ was about $12.5 trillion – or almost 69% of the entire US GDP.   Clearly consumer spending is a REALLY important piece of the US economy!

But here’s the problem: GDP numbers are not proactive … we seem them months after economic events have occurred. Which means we can’t make financial/investment choices – personal or business – before the economy turns sour … only after.

Not good. We want advance notice of an economic decline. The SHI may help give you that. Our objective with the SHI is to be predictive, to anticipate when the economy is going to ‘turn’ and give you the ability to take action early – not when changes are too late.

Taking action: Just keep up with the weekly column. If the index changes appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time. Trending is very important…and we’ll watch the trend.

THE BLOG:  Let’s take a brief detour and look ‘behind the numbers’ in consumer spending and behavior.  Once again, let’s turn to our friend, FRED, over at the St. Louis FED to view a chart:

First, note the word ‘real‘.  This is not the opposite of ‘fake’ but simply means the numbers are adjusted for inflation.   ‘Real‘ means inflation adjusted; ‘nominal‘ means the numbers are not adjusted for the effects of inflation.

It’s easy to see US consumer spending increases fairly consistently.   With the exception, of course, during recessions.  Does a drop in consumer spending cause a recession?  Usually a decline is consumer spending is at the leading edge of a recession.   Which is why I’ve created the SHI.

For decades now, the University of Michigan has surveyed consumers – every month – to produce the “Index of Consumer Sentiment,” or ICS.  This consumer confidence index – which has a ‘normalized’ value point of 100 created back in 1966 – uses a consistent methodology to collect data.  As a result, it helps us understand how the ‘consumer’ is feeling at any given time, about the economy in general.  If consumers are feeling optimistic, they tend to spend money.  And the opposite is true.

Here’s a chart showing the survey outcomes over the past 10 years:

The first very apparent conclusion is consumers – at least in the last 10 years – are not as ‘confident’ in the economy as they were back in 1966 – no index reading exceeds 100!  In July of 2016 the ICS was 89.5, down from 93.5 the month before.  But the trend line is good, indicating that over all consumers are feeling fairly good about the future.

Here’s a 50 year chart – notice the red line I’ve added at 100:

It’s interesting to see that the ICS has only exceeded 100 one time in the past 50 years – the period between about 1997 and 2000.   The US consumer was extremely confident then!  Of course, this exude of confidence was shortly followed by a NASDAQ stock market crash…and a recession.   Interesting.

Consumer confidence and consumer spending were both severely tested between 2007 and 2009.  It’s interesting to note consumer confidence dropped precipitously almost a year before the PCE declined.   Again, interesting.

All right, shall we head over to the steakhouses?   See what delectable entrees they are serving up today?

Interesting seems to be the word of the day.   For the first time in quite a while, there are a number of open tables at Mastros Ocean Club before 9:00 pm!  Wow!  The others seem to be showing consistent behavior.  Let’s take a look:

Last week, the SHI was a positive 3, and Mastros’s was completely booked until 9:00 pm.  Not now.   As a result, our SHI is a bit lower this week – down to a negative (-7 ) – a full 10 points lower than last week.  Is this meaningful or concerning?   Let’s take a look at the overall trend:

It’s been a while since we’ve had a reading this low.  We have to go all the way back to April 27th – when the SHI was a very low -23.  Since then, we’ve recovered consistently week over week – until now.

If we remain this low (or lower) next week, that might be bit concerning.  For now, I’d simply say we need more data.  Like the FED, we’re data dependent!  🙂

Stay tuned!

• Terry Liebman