Consumer Expectation Level
Why Dow Jones not march past towards 11000? Why Nifty gets fainted near 5400 level? Why almost all world markets are stuck in a range? Why Fund managers take a cautious stand? Why most global indices are below their 200 days moving average? Interestingly, Sri Lanka is in top position in terms of rise in indices in last 12 months, whereas India is in 11th place out of 35 global indices.
Reason is not any technical cause, so I think. Rather, it is purely fundamentals of the world. What are those concerns and which factor weighs most.
I got it as Consumer spending, consumer expectation. A Company’s growth is driven by consumer spending. This means, a company grows as long as its products sale grows in future date. A company invests more in its production capacity looking to its future sales. Thus, business consumption is a calculated risk taken by company based on its projected sales. In other word, the hope of future sales of a company drives investment by a company and future sale is dependent on consumer spending. If sales do not materialize, if for some reason the consumer does not participate, or participates at a lower than expected level, business investment cannot continue and the accumulated inventory has to be sold off rather than replaced. Beyond a finite point, no executive will build that new plant, hire workers or stockpile materials unless there are sales to justify the expenditures.
The second consideration concerns the content of the sales growth. In this I will offer a bit of conjecture. The severity of the recession combined with the financial panic induced consumers to stop all but necessary purchases. The magnitude of the sales decline implies that not only were discretionary purchases delayed, but many replacement but not mandatory items were neglected as well. Even if a family could have afforded a new car, many households must have elected to forego the purchase. The same was probably true for whole categories of goods, which are not quite discretionary but not necessities either.
Are these once delayed purchases the consumption that has fueled the recent sales growth? Beyond these postponed items, has the consumer regained sufficient optimism to make those discretionary purchases that provide the growth factor in GDP?
From the relative modest size and pace of the retail sales improvement over the past one year, the answer would appear to be no. This does not mean that consumers will not gradually resume spending a larger part of their discretionary income. However, those expenditures will likely depend on jobs and unemployment.
Consumer attitudes and confidence give a gloomy picture of the immediate future.
The health care legislation appears to be the reason behind the large and unexpected drop in sentiment. Pessimism also stems from the tax environment, with large pluralities expecting their taxes to rise in the near future.
Historically, this level of consumer expectations especially, in US & Europe supports only very modest 0.5%-1.0% annual growth in consumer spending. In the eyes of the consumer, the economic future has many questions. People are inclined to caution. Logic, common sense and experience dictate restraint. Much will have to improve in the unemployment picture before consumers are ready to fund a real recovery in spending.