People More Hopeful But Can't Spend the Hope

Discover Financial sponsors a large poll of consumers. The upbeat title of its August survey is unfortunately misleading. Discover® U.S. Spending MonitorSM Rebounds in August, Rising 3.5 Points as More Consumers Gain Confidence in the Economy is the title, but the rise is all in the expectations. Here are some of the facts:

For the third straight month, over 50 percent of consumers plan on cutting discretionary personal spending in the month ahead. In August, 52 percent planned on spending less on going out to dinner, movies, or sporting events. Other than May 2009, this number has stayed at or above 50 percent for the last 18 months.

Despite the recent improvements in the housing market, more consumers, 53 percent, plan on cutting home improvement expenses in the month ahead, a 3-point increase from July. Nearly half, 48 percent, are also planning to cut major personal purchases, like vacations, out of their budgets.

The following is telling:

Improved economic and financial confidence did not lead to more consumers having money left over after paying the monthly bills. Only 46 percent reported money left over in August, a Monitor-low and 5 points lower than a year ago. Furthermore, of those who did have money left over, 22 percent reported having less money left over than the previous month, a 3-point rise from July and the highest this number has been since December 2008.

Here's the only real "sort-of" good news:

Only 46 percent of consumers feel economic conditions are getting worse, a Monitor low and 6 points less than July. In August 2008, 65 percent of consumers felt economic conditions were deteriorating.

An improved economic outlook also correlates with less consumers feeling their finances are getting worse. In August, 46 percent of consumers felt their finances were headed in the wrong direction, a 5-point improvement from July and the lowest this number has been since December 2007.

Regarding the above two paragraphs, the first can be discounted because most people have only a vague grasp of the general economy. Even "experts" don't know much! Re the second paragraph, it's not clear how to square that with the personal data showing only 46% of respondents having money left over after paying their bills, a Monitor-low number.

Overall, this poll of 8200 people polled nightly throughout August is consistent with the Gallup data that shows that people are more optimistic about the future than they are actually seeing improvement in the here and now. I would posit that this explains the stock market rise and that there has been a positive feedback loop therein. A falling stock market and some downbeat talk out of "authorities" could similarly feed on itself, given the reality of year on year aggregate loss of wages and therefore buying power.

Further unfortunately, many profitable companies such as IBM and P&G have no or negative tangible net worth, so if stock prices start falling, they are in the same boat as consumers: lacking reserves to cushion bad times. No one can know where the bottom is if their business prospects turn down because they have become so leveraged.

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