An obscure and arcane economic indicator suggests that Federal Reserve Chairman Jerome Powell was wrong when he said at his Nov. 30 news conference that there is a path to a soft, a soft landing for the U.S. economy.
The indicator traces to the big differences between consumers' views on the economy in general and their immediate personal financial circumstances in particular. A recession has occurred every time over the past four decades in which this divergence even approached its current level.
This indicator focuses on the Conference Board's Consumer Confidence Index CCI and the University of Michigan's Consumer Sentiment Survey UMI To measure this divergence, there is a significant difference in emphasis, according to James Stack of InvesTech Research, from whom I first heard about this indicator. According to Stack, the CCI is more heavily influenced by consumers' attitudes towards the overall economy, while the UMI is more heavily weighted towards their immediate personal circumstances.
The CCI is currently higher than the UMI. The overall economy has proven to be remarkably resilient, as American consumers' attitudes towards their immediate financial situation continue to sour, due to everything from inflation to higher mortgage rates to a softening housing market. The Labor Department reported the creation of a much-higher than expected number of new jobs in the December 2 jobs report.
The magnitude of the current divergence is more surprising. According to the latest data released by the Conference Board and the University of Michigan in late November, the CCI is 43.4 percentage points higher than the UMI. The latest reading is at the 98th percentile of all the monthly readings of the past four decades, which is close to a record.
As you can see from the chart above, a recession was in the economy's not-too distant future shadowed bars the past four times this difference rose to even 25 percentage points.
As this chart's correlations are, it is difficult for a sample with just four observations to be statistically significant. To test the indicator's potential, I measured its ability to predict the S&P 500 s SPX, the inflation-adjusted total return over the subsequent one and five-year periods. The table below shows the data since 1979, when monthly data for both of these consumer indexes began to be reported.
The difference in this table is statistically significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine.
What is the bottom line? It is not good news for the U.S. stock market in general or the economy in general, that consumers are more optimistic about the overall economy than they are about their immediate financial circumstances.
Mark Hulbert is a regular contributor to MarketWatch. He can be reached at mark hulbertratings.com
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