Why consumer confidence has fallen as 2014 started off weak

The Bloomberg Consumer Comfort Index decreased to -33.1 for the week ending February 2

The Bloomberg Consumer Comfort Index is a weekly sentiment index that covers three critical variables: respondents’ perception of the state of the economy, their evaluation of their personal finances, and whether it’s a good time to purchase goods and services. The index is a random sample of 1,000 people conducted through telephone interviews with relatively straightforward questions. Are the state of the economy, personal finances, and time to buy goods and services excellent, good, not so good, or poor? Since the index started in 1985, it has averaged -16, so “neutrality” isn’t necessarily zero. The highest reading the index ever recorded was +38 in early 2000. The index bottomed at -54 in 2008.

Bloomberg Consumer ComfortEnlarge Graph

View of the economy is still highly negative

While the report is on balance negative (not surprising, given that the index itself is negative), perceptions of the economy are highly negative (20% positive versus 80% negative), as well as the perception of whether it’s a good time to buy (30% positive versus 70% negative). As to personal finances, the index improved: 51% positive versus 49% negative. So when you ask consumers about the world around them, they tend to be more negative, whereas when you ask about their own personal situation, they’re more neutral. All three sub-indices have been falling, and it appears that higher interest rates are beginning to flow through to the real economy.

Implications for homebuilders

Consumer sentiment is a critical factor in risk-taking. In fact, KB Home (KBH) in a recent earnings conference call cited consumer confidence as a more important variable than interest rates. Rising real estate prices had been driving increases in orders. However, order growth has been slipping for the builders. Student loan debt remains a problem for the first-time homebuyer, but even the first-time homebuyer seems to be reappearing. Given that the cost of renting is way higher than the cost of owning, a change in sentiment should cause a big spike in new orders. Housing starts have been highly depressed since the real estate collapse. Even a marginal increase in demand should drive homebuilders forward. Specific homebuilder stocks that will be positively affected by changes in consumer sentiment include Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL). Investors can also invest in the sector via an ETF like the S&P SPDR Homebuilder EFT (XHB).