As I have written many times in the past, we pay close attention to both the Conference Board’s monthly measure of consumer confidence, as well as a similar measure from the University of Michigan which they characterize as consumer sentiment. Both descriptions are really interchangeable, as they measure how consumers feel about the times, both politically and economically. We publish a monthly measure of a mix of indices known as the AVP Pulse Index, which appears in Rock Products, a sister publication; think of it as a Dow Jones Industrial Index of construction, where we measure a number of metrics including consumer sentiment, and run them through a proprietary algorithm. The output then tracks the upwards or downwards movement of the general construction industry, the biggest driver of concrete production by far.
But the news continues to be mixed, if not tangled in a difficult-to-comprehend disarray as consumer confidence stands in sharp contrast to Gross Domestic Product, 70 percent of which consists of the American consumer. The Conference Board and the University of Michigan consumer indexes track each other closely as they have historically, and both reported the third consecutive month of decline in October, falling sharply in the most recent period.
As I have stated many times in the past, the biggest factor contributing to the downdraft of confidence, or sentiment, is that big digital billboard that hits us right between the eyes every week: the price on the gas pump. That figure—and more sticker shock as consumers roll down the aisles at the supermarket—are the two biggest contributors in driving concerns by consumers.
While it appears consumers recognize that inflation has slowed down from its peak last summer, they cannot ignore that their budgets remain stretched, and their purchasing power reduced. Given the high-frequency and widespread nature of food and gas purchases across American families, it is no surprise that concerns over the prices of these goods loom particularly large in the minds of consumers. Even so, strength in incomes continues to support aggregate spending for the foreseeable future.
So how did we get such a huge contrast in the shape of the economy in October if consumers were so down in the dumps? In an utter surprise I have never encountered in my 50-year career, the economy bolted forward in the third quarter, with the Gross Domestic Product up a whopping 4.9 percent against the backdrop of falling consumer sentiment, and the Commerce Department ascribes the majority of this jump to consumer spending. And to punctuate this startling number, understand that economic growth at that pace is considered blistering hot and would reflect a surging economy in more normal times.
How can this be? Consumers down in the dumps, yet spending like drunken sailors? I have never seen anything like it.
But many economic pundits state there are warning signs underlying the eye-popping numbers. Americans saved less and their incomes, adjusted for inflation, fell over the summer. That could mean the pace of spending will ease in coming months, and business investment also stalled. Meanwhile, rising long-term interest rates, wars in Ukraine and the Middle East, and the possibility of a partial government shutdown could cause economic cracks to emerge. But to be sure, those same predictions have come from those same pundits for more than the last year, and the American consumer has been unshakeable in their spending despite the way they feel, proving all those predictions wrong so far.
Remember that I have been espousing that our construction economy in general, and concrete production in particular, will remain strong for years to come as the Infrastructure Investment & Jobs Act money continues to flow through our industry. So even if the consumer slows, bringing the economy to a slowdown with it, the concrete industry will remain strong. And as a final prediction, as soon as interest rates start to fall, watch the pent-up demand in new home purchases come unleashed as homebuyers start flying off the benches, snapping up houses with an eye towards lower mortgage rates in the years ahead. All of this signals additional strength to the concrete industry for years to come.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.