The equity markets performed well last week after a historic late day rally on Tuesday. However the prevailing mood of business and consumers are of significant caution and concern.
At the end of the day 70% of our economy is based on consumption. If people aren’t buying, then businesses can’t be hiring. If business aren’t hiring, then people can’t be buying. So which needs to come first in this “chicken or the egg” dilemma? We believe the consumer needs to come first and then businesses will follow. Keynes described this predicament in 1936 as spontaneous optimism.
In a recession, government spending can help spur spontaneous optimism. However, it appears to have had little effect on our economy over the last three years. Outside of government spending Keynes would probably advocate for two additional solutions: a stable tax policy and a regulatory environment that allows businesses and consumers to make longer term plans. With the house and the senate controlled by different parties and a political polarization above 90% this doesn’t look likely.
M&A and IPO activity can be indicators of spontaneous optimism for businesses. Both of these events can inject more liquidity into our economy and suggest optimism from buyers. M&A activity has been fairly stagnant over the last few quarters and ventured-back IPO activity is at the lowest level in seven quarters according to Thomson Reuters and the National Venture Capital Association (NVCA).
For consumers, an expansion of credit and willingness to borrow can be early signs of spontaneous optimism. Unfortunately, according to the Federal Reserve, consumer credit decreased at an annual rate of 4.5% in August. This was first decrease in in consumer credit in nine months.
None of these look very optimistic. However, as W. Somerset Maugham (the best paid author of the 1930’s) said, “When things are at their worst, I find something always happens.” He probably knew a thing or two about spontaneous optimism.