Evidence continues to pour in that the U.S. consumers and the U.S. businesses are experiencing the economy very differently. Specifically, the consumer has been feeling more confident thanks to emerging bullish trends like the rebound in home prices. Meanwhile, businesses are becoming increasingly cautious as the fiscal cliff looms.
Morgan Stanley just published its October read on its proprietary Business Conditions Index and it collapsed to 41% from 55% in September.
“Optimism surrounding supportive monetary policy has faded while fiscal cliff and election uncertainty have steadily risen,” wrote Morgan Stanley economist Dane Vrabac. “The stronger than expected employment report did little to boost enthusiasm.
“Reports of uncertainty created by the fiscal cliff continue to increase. In October, 51% (versus 49% last month) of analysts responded that companies have downgraded business conditions as a result of cliff-related issues.”
Photo: Morgan Stanley
The most worrying component of the report was the stunning drop in hiring plans:Despite the stronger than expected employment report for October, both hiring indices fell to multi-year lows. The hiring index dropped 10 points to 44%, low since December 2009, and the hiring plans index sunk 13 points to 44%, low since August 2009. To put this into perspective, in August 2009 the unemployment rate was at 9.6%, still on its way to maxing out at 10% two months later. By that December, it had only recovered 0.1% to 9.9%. Given the volatility of the component indices, it’s too early to make a strong call, but these indices warrant close attention in the coming months.
Meanwhile, we learned today that the NAHB homebuilder index climbed to a six-year high. According to Deutsche Bank’s Joe LaVorgna, this means housing starts could double within just six months. This could be bullish for the U.S. consumer.
Hopefully, Washington will soon address these fiscal cliff issues. The consumer is coming back. But as you see above, persistent business uncertainty surrounding the fiscal cliff could eventually hit the consumer through a higher unemployment.