Confidence versus Consumption

As I was getting out of my car this morning and crossing the parking lot to my office, our landlord flagged me down.  Now, I’ve only seen this guy five or six times in my life, and each time the news wasn’t good.  “You’re office got flooded last night, ” “stop bringing your dog to work, ” and “don’t block the chiropractor’s reserved parking space” are the typical conversations he and I have had in the past.  Today, though, he seemed concerned about me.  Genuinely concerned.

“How are you guys holding up in the market these days?  Still making money?  I heard a lot of hedge funds are losing a lot of money this year.”  I assured him that we’re doing just fine and thanked him for asking.

As I continued across the parking lot it occurred to me that he might…  just might… not really have a humanitarian concern about our financial well-being.  Apart from our rent-paying ability, that is.

It must be tough out there.  Even tougher than I imagined.  What difficult economic times are these when landlords have to stand in the parking lot to gauge the rent-paying ability of their lessees!

About two hours later, the Michigan Sentiment of Consumer Confidence numbers were released.  Looking at the report, I better understood my landlord’s angst.  The index was expected to print at 62.5.  It came in at 54.9.  To give that number some context, the index hasn’t been that low since the third year of Jimmy Carter’s term.  With consumer confidence this low, angst is just part of the landscape.

What strikes me as odd about the Consumer Confidence number is that it came only 90 minutes after retail sales numbers were released.  Overall, retail sales were in line, and retail sales ex-autos beat expectations.  How is it that consumers feel as badly as they did way back when mortgage rates were at 12% (1980), but are spending their money faster than expected?

Maybe the answer lies in how Apple and Exxon Mobil keep trading places as the largest company in the world.  Despite high unemployment and lack of overall confidence, every consumer needs an IPhone, an IPad, and gasoline.  It seems that our economy has become bifurcated.  On one hand, high-end and fashion stores are doing quite well.  Look at Tiffany’s and Apple.  On the other hand, those selling necessities are holding there own (although I’ll concede even Wal-Mart is beginning to see declining traffic).  In the middle, the pain is being felt.  Restaurants are suffering as more people opt to eat in, for example.

Maybe it’s a reflection on how the middle class is disappearing in our country.  The rich shop at Tiffany’s and the poor eat at home.  Or, maybe it’s a reflection on shifting priorities.  “I have to have an IPad, so I’ll skip this month’s car payment.”  While we’re not in the business of making either political or sociological statements, I wonder about the investment implications.  It wouldn’t seem that these patterns could persist over long periods of time.  Can firms like Apple continue to pull discretionary income from an ever-more-cash-strapped consumer?  Can the rich continue to conspicuously consume as society becomes more polar in terms of wealth?

In addition to the usual macro factors we watch, the seemingly irrational spread forming between confidence and consumption has now been added to the mix.  The odds may be higher that consumption will come down to meet confidence rather than the other way around.