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

Comments

Popular posts from this blog

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

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here:   https://tradingstockalerts.com/software/downloadpatch Contact us if you have questions or identify any new issues.

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much anything