Consumers losing their nerve

Consumers on both sides of the border are losing confidence in the economic recovery and analysts fear that could mean many lose their nerve in spending more money to stimulate further growth.

OTTAWA — Consumers on both sides of the border are losing confidence in the economic recovery and analysts fear that could mean many lose their nerve in spending more money to stimulate further growth.

TNS Canada said Friday its reading for July registered a 4.5 percentage point drop in consumer confidence, while the University of Michigan polling found sentiment in the United States dropping almost 10 points.

Given that consumer spending is the biggest single contributor to economic growth, analysts say fear could become self-fulfilling prophecy if the concern translates into action.

“There’s no doubt that until consumers start spending, we’re not going to get a recovery because consumers drive demand,” said Michael Antecol of the research marketing firm TNS Canada.

On the other hand, Antecol said consumers have good reason to feel reticent about sticking their necks out, or opening their wallets, given softening conditions, still high unemployment rates, and expectations that as governments move to reduce ballooning deficits, they will do so on the back of taxpayers.

He said the introduction of the harmonized sales tax in Ontario and British Columbia, which went into effect July 1, has made households in those provinces wary of further tax hikes.

The Canadian data shows dropping confidence across the board, including expectations for the economy, income and future buying intentions.

In the U.S., Michigan reported that both the current and future expectation components of the survey were down about 10 points to their lowest levels in a year or two.

The two surveys coincide with previous samplings by the Conference Board, measuring falling confidence in June.

Whether the surveys predict future spending intentions, or are merely concurrent with the existing slowdown, has often been debated by economists.

But Jennifer Lee of BMO Capital Markets said the surveys, particularly the one in the U.S. that came in far more negative, were considered “bad news.”

“When it rains, it pours,” she said. “The Americans have a lot more to worry about than we do in Canada, but we’re facing the same external issues.”

Similar challenges have been felt across Europe, Japan, China as well as the U.S. over the past few weeks. The world’s largest economy has seen jobs, retail sales, housing and manufacturing actually retreat in the last month, leading to talk of a double-dip recession.

On Thursday, the Federal Reserve cautioned that it may have to consider more monetary easing to re-start the economy.

Equity markets have been almost as nervous as consumers. Friday saw a large sell-off in both Toronto and New York with losses of 172 points and 261 points respectively. As well, the Canadian dollar fell 1.44 cents to 94.82 cents US on softening prices for commodities.

The situation is not nearly so dire in Canada, where the central bank is widely expected to continue raising interest rates by a quarter point for the second time in two months next week.

Statistics Canada reported Friday that the country’s leading economic indicators index rose a better-than-expected one per cent in June, after revised upticks of 1.1 per cent in both May and April.

However, David Rosenberg of wealth management firm Gluskin Sheff, known for his bearish outlook on the economy, did not mince words in a note to clients.

“Only a fool or the most visually challenged can’t see that growth is moderating significantly,” he wrote. “Canada too is softening and the cracks are starting to deepen in the housing market.”

Canada’s housing market, a major component of growth earlier in the year, registered a 13.3 per cent sales retreat during the second quarter ending June 30.

Bank of Montreal economists said Friday that evidence of Canadian weakness is not strong enough yet to justify standing still on interest rates next week, but possibly could signal a halt on the tightening cycle afterwards.

For the U.S., the slowing trend is no longer in question, and BMO’s chief economist Sherry Cooper said Congress should introduce more fiscal stimulus to protect jobs.