Consumer confidence slides, as COVID-19 spreads

Bart Van Ark, Conference Board Chief Economist, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss the unexpected drop in consumer confidence during the month of August.

Video Transcript

BRIAN SOZZI: All right, consumer confidence is slipping a bit as the COVID-19 pandemic spreads. With us now is the chief economist at The Conference Board, Bart Van Ark. Bart, good to good to see this morning.

The headline really, I think, is a bad miss versus expectations. You saw the Dow sell off pretty strongly after this report. Is this the first true sign that consumers badly need that next round of fiscal stimulus?

BART VAN ARK: Well, it might very well be, Brian. It's true that the index actually dropped off quite substantially from 91.7 to 84.8. And that's below the level it actually had in April, which was when it was at its deepest point before. So it is a pretty big decline.

And we were a bit surprised, because we've seen the COVID situation, particularly in the south of the country, improving somewhat over August. So we had expected that would translate itself into better results. It did in the case of Texas, where we actually see a return in consumer confidence pretty much to the June levels. But it didn't do it in, for example, Florida, where it continued to go down.

So yeah, it seems that there is a relationship with what's been going on in terms of the concerns that people have about the COVID crisis, what it means for the economy going forward. And in that respect, the fiscal stimulus and the uncertainty about it hasn't contributed to strength in consumer confidence.

ALEXIS CHRISTOFOROUS: What about how this is going to translate into people spending their money? Because according to the survey, people aren't feeling too good about making big purchases in the coming months. I saw that the share expecting to buy major appliances fell nearly 45%. Those planning to buy a car dropped to 9.7%. So should retailers who are already suffering, many of them, brace for even more pain as consumers start to pull back their spending?

BART VAN ARK: Yeah, we're really going to go into sort of, I think, the second phase of this recession. The first phase was the kind of shock, where we all had to stay home. And even if we wanted to consume, we couldn't. And then when the economy started to open up again, actually, consumer spending then held up pretty well and pretty quickly recovered.

I think we're now going to the second phase that people get concerned about their jobs, they get concerned about the fiscal stimulus that may not come through to the same extent as it did before. We do see that when we look at expectations. In particular, again, people's own financial situation, people are really worried about. And I think all these things are really feeding into the fact that we think the second half of the year is more kind of a demand type of slowdown. And that could actually give us even a little bit of a contraction in the economy, particularly in quarter four. So that is a concern going forward.

BRIAN SOZZI: Bart, is there anything in this report that would suggest it's a short-term bottom, and we'll be sitting here at this time in September with a number that's improved versus this month?

BART VAN ARK: That could happen. But it would only happen, in my view, if we see the COVID situation substantially improve. I mean, there's all these discussions about schools opening up and things like that.

So people would like to see a little bit more a return to normal, which doesn't mean that the virus has gone away, but that we feel that we have it under control. If that's the case, then I could actually see consumer confidence and consumer spending come back very quickly. But I think at the moment, the consumer is just very uncertain about what the next steps are going to be.

ALEXIS CHRISTOFOROUS: Do you think that's it here, that it's about movement or progress in terms of the virus and/or vaccine? Or is it about a stimulus package? I mean, if we were able to get a stimulus package in the next month, do people feel differently about their short-term spending capabilities?

BART VAN ARK: Well, look, a stimulus package is great. But if you still are in a situation that you can possibly get very sick or that you have to stay home or that your kids cannot go to school, that's all not going to help. I mean, remember that we had a stimulus package in the spring. Nevertheless, we had this huge decline in April and May. It's only when the economy started-- only when the COVID situation started to improve in May and in June that we actually saw consumers actually coming back.

So I do think that the COVID situation plays a big role. But to your point, a stimulus package will definitely help for consumers to feel that their spending situation, their financial conditions will remain strong. Therefore, they really can go out and spend their money.

BRIAN SOZZI: Reading between the lines here, Bart, it would sound as though there is a potential risk here for a double-dip US recession. Do you think that's a strong likelihood? And if so, how bad could growth get in the back half of the year?

BART VAN ARK: Well, as a matter of fact, we at The Conference Board do predict that while in the third quarter, which we're in right now, we will see the economy do recover further, that the fourth quarter will actually show a slight dip. There we are really below consensus. The consensus assumes that the recovery will continue.

We have major concerns, and the consumer confidence today is playing into that, that that consumer strength just will not be there. And therefore, demand will get a dip in the fourth quarter of the year. And the economy may slightly contract. It wouldn't be anything compared to what we see in the beginning of the year. It's a kind of demand-driven slowdown, or even a small dip in the last half of-- the last quarter of the year.

BRIAN SOZZI: And Bart, how severe? Can you give us a number?

BART VAN ARK: We're thinking about a decline of roughly about maybe about 1% or 2%. So again, I mean, compared to the huge decline that we're seeing early in the year, it wouldn't be huge. But it's just-- I mean, the main point that we want to make is that this idea that the recovery will just continue, that it may perhaps slow down a little, but it will continue, it's not a given when you look at these numbers.