Shutdown cratered consumer confidence

Can consumers hold up their part of the economy with incomes going nowhere? (AP Photo/David Duprey)

INDICATOR: September Retail Sales/October Consumer Confidence

KEY DATA: Sales: -0.1%; Excluding Vehicles: +0.4%/Consumer Confidence: down 9 points; Expectations: down 13.2 points

IN A NUTSHELL: "The consumer is spending money at a decent pace but Washington really did crater confidence and that is a worry for the holiday shopping season."

WHAT IT MEANS: Can consumers hold up their part of the economy with incomes going nowhere? That is the big question and the retail sales numbers give us some hope that could happen. Spending eased in September but largely because of a slowdown in vehicle demand. Clearly, that is a worry as the rebounding vehicle sector has been a leading light of the recovery. But the only other component where sales fell was clothing. Excluding vehicles, households did go out and buy a fair amount of goods. Importantly, purchases of electronics, which had lagged, picked up during the summer. We stuffed our faces, both at home and at restaurants, and also shopped online. Overall, this was a decent though not particularly exciting report.

While the September retail sales data provided some hope that consumers were still out there doing what they like to do, Washington's impact on consumer thinking provides some real worries that spending might not hold up. The Conference Board's Consumer Confidence Index plummeted in October as Washington's attempt to kill the economy managed to destroy household sentiment. Expectations of the future fell off the table as people were much more pessimistic about both jobs and business activity. Current conditions were down only modestly and that is the one plus as the ending of the shut down could turnaround the politics-driven expectations decline.

MARKETS AND FED POLICY IMPLICATIONS: Washington is a mess and that would not be a problem if what happened in Washington, stayed in Washington. It didn't. And that raises questions about the holiday shopping season. It is likely that confidence will bounce back in the November reports but that could greatly depend upon the October employment data that will be out on Friday, November 8th. If job gains are weak and the unemployment rate rises, as I suspect will be the case, any rebound in confidence could be muted. Unlike politics, which tends to have minimal and short-term effects on consumer behavior, concerns about jobs does lead to slower spending. The actions of our brilliant political leaders and followers undoubtedly caused businesses to be cautious in their hiring decisions during October. Thus, the outlook for consumption this quarter is not for anything great. Investors should recognize this but once again, Fed liquidity is likely to trump weak economics. Isn't it great that Wall Street benefits from poor economic numbers because it means the Fed will continue quantitative easing longer? Not really.