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Consumer spending is highly correlated with consumer sentiment. It makes sense that when consumers believe their jobs are in trouble or they won’t have enough money going forward, they pull back on their spending and only buy what they need. On the contrary, if they believe all is well—they expect a raise at work and have savings—they will go out and buy things they want. This phenomenon increases consumer spending.
As it stands, consumer confidence in the U.S. economy is decreasing, which suggests consumer spending will be in trouble.
Let me explain…
The Conference Board Consumer Confidence Index tracks how consumers are feeling in the U.S. economy. The Board asks individuals how they currently feel about the current state of the U.S. economy, their jobs, and so on and if they believe things will change in the next little while.
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In February, we found that the index declined 1.6% from the previous month. The Consumer Confidence Index sits at 78.1 this month compared to 79.4 in January. (Source: “The Conference Board Consumer Confidence Index Declines Moderately,” The Conference Board web site, February 25, 2014.)
The Conference Board Expectations Index, which tracks what consumers think will happen in the next six months, also dropped significantly. This index stood at 75.7 this month, down 6.3% from 80.8 in January.
These aren’t the only indicators that suggest consumer confidence in the U.S. economy is declining. The Bloomberg Consumer Comfort Index suggests the same. This weekly index is based on how consumers feel about the U.S. economy, their personal finances, and their buying plans.
In its latest results, the Bloomberg Consumer Comfort Index stood at negative 30.6. (The index ranges between 100 and negative 100.) The sub-index, which tracks the buying patterns of consumers, dropped to its lowest level since early February of 2013—it’s below its 28-year average. (Source: “Bloomberg Consumer Comfort Index,” Bloomberg, last accessed February 25, 2014.)
This is something I have talked about over and over again in these pages. As consumer confidence declines, consumer spending will be hurt. If this phenomenon continues and we see consumers in the U.S. economy get even more frustrated, they will pull back on their spending.
This will have a direct impact on the companies that are related to consumer spending—or more specifically, those companies that sell or make consumer discretionary products, the ones consumers don’t need but want when they have the extra cash.
Investors who are looking to profit as consumer confidence in the U.S. economy deteriorates may want to look to short exchange-traded funds (ETFs), like Market Vectors Retail ETF (NYSE/RTH). For some, shorting may not be best route, since it can lead to unlimited losses if the trade continues to go the opposite way; for these investors, you may want to look to buy ETFs like Consumer Staples Select Sector SPDRA (NYSEArca/XLP). This ETF tracks the performance of companies that sell the non-discretionary goods that consumers need regardless of the level of consumer confidence.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.