The world has apparently not ended

The FNB/BER consumer confidence index rose by 5 points to a reading of -1 during 3Q2008 from -6 in 2Q2008.

That may be counterintuitive, given the tremendous pain observable in the motor trade, much of retailing, throughout much of the residential property market, in the residential building trade, in retail banking and also even in employment levels and prospects.

It would have been more natural at this stage to get still lower consumer confidence readings, with a growing majority of consumers showing a further loss of confidence, given the state of household spending.

But then a few things stand out rather starkly.

For instance, BER opinion survey results never move in a straight line.

Only by smoothing results through a running average does one gain a sense of trend over time, even if cyclical turning points tend to be sharp.

But then our business cycle turnings in recent decades have been fairly abrupt affairs, as much getting caught in the downdraft of an external (or domestic) shock, as by external windfalls all of a sudden lifting us up.

Given the abrupt falling away, indeed collapse, of consumer confidence during 1H2008, suggesting a really unprecedented pace of deterioration in sentiment, it would have been surprising if this rate of decline had been maintained for yet another quarter.

Given the nature of the opinion survey, we would expect pullbacks along the way, smoothing out the hit-and-miss nature of the quarterly results, sketching the true trend over time.

On this reading, this small 3Q2008 bounce in confidence readings (all of 5 points) after a cumulative 28 point decline over the two preceding quarters merely injects a bit more realism into the proceedings as to how things are changing out there.

Even so, the record high consumer confidence of nine months ago is still toast. A different mood, much fouler, exists out there compared to late 2007.

But then we should now perhaps emphasize less the shocking rate of decline in 1H2008, moderated by this minor bounce in 3Q2008, and focus rather on the more obvious fact that today optimism/pessimism at 50/50 is now better balanced in the economy.

This also suggests we may still be some way from a truly recessionary condition as traditionally also reflected in FNB/BER consumer confidence readings. But then it is still early days, with 4Q2008 and 1H2009 identified early on as the most risky period on this score.

Then also this modest bounce in consumer confidence during 3Q2008 may perhaps be taken as an important signal by many South African consumers that the world apparently didn’t quite end during 1H2008, even if caution is still warranted.

This is perhaps the real news of the moment, if true.

Across all consumer segments, by population group, income, language, age, gender, broadly the same pattern can be observed.

Not only is the reading about the economy these next twelve months less dire, tempering the deeply negative impression created in 1H2008, but confidence about own financial prospects has recovered even more strongly, especially among high earners.

In contrast, every consumer segment bar none worsened their view about now being a good time to buy durable consumer goods during 3Q2008. Instead, a growing majority of consumers apparently think it wise to sit tight in these increasingly challenging times.

Black and white consumer confidence continued to converge in 3Q2008, now only still separated by 7 index points, really a minuscule difference, given the context. Post-1994 the gap averaged over 40 index points for five years before gradually narrowing in subsequent years.

As to why consumer sentiment is changing in this manner, a few things come to mind.

Electricity outages in the opening months of 2008 were deeply upsetting, indeed enormously so, enough for some people to emigrate and many to contemplate it.

However, throughout the subsequent winter months there was nary a hint of new trouble. The electricity problem seems to have gone away. Of course it hasn’t, but as a mood depressant it certainly is much less in evidence.

During 2Q2008, the outbreak of xenophobia attacks was again most upsetting to some.

Most disturbing for all, however, were the petrol and food price increases of 1H2008, and the resumption of interest rate increases in April and June. For many indebted households there was a sense of repeating 1998, and possibly revisiting prime 25%, certainly in terms of the effective debt servicing burden experienced by them.

But by 3Q2008, there was a distinct change in the air, indeed more than one turning point starkly visible.

Oil peaked in July and then rapidly receded, pulling petrol prices along, with promise of more sliding to come. Inflation forecasts uniformly predict declines ahead in 2009. The SARB went on hold for the third time in August, with the general acceptance that this was the peak, with renewed interest rate cutting ahead in 2009.

Consumers could be buying all these propositions to a greater extent than perhaps generally acknowledged.

This interpretation would need to explain away a few other wrinkles, such as consumers either approving (as many clearly do) or otherwise also looking through the local political drama of recent months and accepting the logical outcome next year.

And many perhaps also sense they will remain only interested bystanders to the housing and banking dramas playing out overseas, with the right solutions ultimately forthcoming, rather than to be drawn into the melee.

At the same time, consumers today are still sitting on an extensive stock of relatively young durable goods and possibly an oversupply of housing (though only in certain market segments). Many may increasingly be willing to delay replacement decisions some more while reducing indebtedness from the euphoric levels reached in the late stages of an ultimately exuberant consumer boom.

Thus, a somewhat less dire perception of the economy’s fortunes may have come about, also infecting sentiment about own future finances.

Yet a deepening realism about debt exposure and risk could be encouraging growing numbers of consumers to enjoy what they have for now rather than keep adding to their stock of durables and further increase their indebtedness at this still uncertain juncture.

Thus, this 3Q2008 FNB/BER consumer confidence reading is a most interesting number, and a challenging one.

On balance I am inclined to believe that this is merely a minor correcting bounce after a stupendous fall in the preceding two quarters, in which case the next few quarters can still see renewed declines in FNB/BER consumer confidence readings.

Certainly the state of household incomes, spending and credit behaviour do warrant such an interpretation, also on historic grounds in previous cycles.

Furthermore America, Europe, Japan and other bits of the English-speaking world are apparently already in recession and this condition is likely to deepen before bottoming out sometime next year.

Consumers seem to be very much alive to the dynamic of changing events and accompanying fortunes, though ever so prudently becoming more cautious about indebtedness while enjoying more fully their existing stock of durable goods and delaying replacement yet more.