As Consumer Confidence Tanks, Who Loses in Retail?

As consumer confidence seems to be falling off a cliff just before the critical holiday shopping season, I'd like to measure which retailers could be affected most in the months ahead. This morning, the RBC Cash Index indicated improvement in October, as the confidence measure improved to 80.6 from September's 71.1.

The result was no doubt driven by the market reacting to the Fed rate cut last month. I expect the drivers of longer-term confidence are not yet supportive, however. Last week, the Conference Board posted its September Consumer Confidence Index at 99.8, down from August's measure of 105. The metric also came in short of Bloomberg's consensus of economists, who anticipated a reading of 104.

Finding a trend in the Conference Board's Consumer Sentiment Index has not been quite as easy as the search within the University of Michigan's record. A quick study of the recent history of the Michigan sentiment reading shows a clear trend downward as the year progressed, with a bump up in July as it became clear that second-quarter GDP growth would be relatively strong. Since July, however, it's become increasingly clear that future economic growth could soften.

Month	Conference Board Consumer Sentiment	University of Michigan Sentiment
September	99.8	84.3
August	105	83.4
July	112.6	90.4
June	103.9	85.3
May	108	85.3
April	104	87.1
March	107.2	88.4
February	112.5	88.4
January	110.3	91.3

The Wealth Effect

Weighing on consumers' minds and pocketbooks are relatively expensive energy and gasoline prices, rising food and dining expenditures, costlier mortgage payments and a loss of home equity value, which is often referred to as the wealth effect. The perception of having value in one's home lends to consumers' mental well-being and propensity to spend.

Thus, many experts believe, as I do, that this reverse of the wealth effect should provide yet another limiting factor to consumer spending. In any event, the many pressures noted above are a lot to swallow, and with the consumer carrying the heavy load within the American economy, recession seems a strong possibility.

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At the time of publication, Kaminis had no positions in the stocks mentioned, although positions may change at any time.

Markos N. Kaminis, the Wall Street Greek, is currently building his own financial advisory business. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kaminis appreciates your feedback; click here to send him an email.