Skip to main content

Citi: consumer down and out, economy, too

Periodically Citi releases their report entitled "Comments on Credit". This issue is particularly pessimistic.

The report features the Citi Financial Conditions Index (FCI), a proprietary index that is a composite of a number of financial measures. The index is a weighted-average of six variables, including option-adjusted corporate credit spreads, equity values, the money stock, the trade-weighted dollar, mortgage rates and energy prices. It is stated in terms of standard deviations from a mean value. A reading of plus one sigma, for example, would suggest financial conditions are imparting a strong tailwind to aggregate demand that could promote inflationary imbalances and therefore may be a signal that monetary policy is overly accommodative. A reading of minus one sigma is suggestive of financial drag on the outlook that may point to undesirable slowing and rising unemployment.

So where does the index stand today? Here is the money quote from the report:
"At more than minus five standard deviations below norms, the FCI is probing depths beyond our experience. It suggests that especially harsh economic conditions are about to unfold."
The ramifications are widespread. The following chart relates the Citi FCI and consumer spending. The chart shows the FCI is well below the levels seen during the last recession. The chart also shows that the change in consumer spending as represented by the PCE is already measurably weakened and is projected to go even lower.


The report emphasizes that the pullback among consumers is becoming a key driver in what Citi unequivocally refers to as a recession. A consequence is that businesses are being forced to scale back spending and investing as the weak consumer contributes to a weakening in new orders. This was brought home by the recent poor durable goods report. More importantly, weaker spending has reinforced the slowing in hiring. Last Friday's Non-Farm Payrolls report showed that employment declined by 159,000, much worse than expectations. Based on this data, Citi thinks that labor market weakness is now pervasive.

In Summary --

Citi sees a series of cascading effects. The FCI shows extreme weakness in its financial measures. The correlation between a weak FCI and weak consumer spending appears to be strong. By extension, this will drive a slowing in production which will in turn drive a decline in employment which, in a self-reinforcing loop, will further weaken the consumer and so on.

The bottom line is that Citi sees the consumer and the economy to be down and out for some time to come.

Source: Citi Comments on Credit, October 3, 2008
Labels:

Comments

Post a Comment

Popular posts from this blog

Time to be conservative with your 401K

Most of the posts I and other financial bloggers write are typically focused on individual stocks or ETFs and managing active portfolios. For those folks who are more conservative investors, those whose main investment vehicle is a 401K, for example, the techniques for portfolio management might be a little different. The news of stock markets falling and pundits predicting recession is disconcerting to professional investors as well as to those of us who are watching our balances in an IRA or 401K sag. What approach should the average 401K investor take? Let's assume that the investor is contributing on a regular basis to one of these retirement accounts. There are two questions that the investor needs to ask: 1. Should I stop putting the regular contribution into stocks? My feeling is that investors making regular contributions are being handed a present by the markets. Every week the market goes down, these investors are lowering their average cost. When markets reco...
7 comments
Read more

The Trouble with Trend Reversal Indicators

Many of us use various trend reversal indicators to time our trades. Our desire is to determine when prices have changed direction so that we can ride the new trend. Why doesn't it always work out? The first reason, of course, is that unforeseen events often drive prices in unexpected directions. That is something we can't change and it often makes all of us technical traders crazy. On the other hand, sometimes an unforeseen event is a prelude to a new trend. A stock spikes up on a what seems to be a one-time piece of good fortune and soon falls back. Does it start making its way back up or does it resume a previous down trend? The conflict within trend reversal indicators is that, though they can definitely tell when prices change direction, they suffer from two problems. One, they often can't determine how significant that move in prices actually will be. Two, they are often lagging indicators. As such, they can be late in providing a signal, sometimes leading the investo...
1 comment
Read more

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation ...
4 comments
Read more