by Benjamin Tal
Senior Economist

The Canadian consumer turned in another strong performance in the fourth quarter, as real personal spending climbed by nearly 4% annualized. But a closer look at the data reveals that the recent surge in spending is not backed up by rising consumer fundamentals. In fact, the “V-shaped” recovery in consumer confidence that we have seen throughout the second half of 2009, has actually coincided with a drop in the ability of households to spend.

After reaching a 15-year low in late 2008, consumer confidence, as measured by the Conference Board’s Consumer Confidence Index, has improved by 60%, and is now back to its long-term average. Although still almost 20% below its 2007 peak, it is in a much better position than the corresponding measure south of the border, where consumer confidence is now almost 60% below the level seen in late 2007.

The improving mood of Canadian shoppers over the past few months led to a jump in real consumer spending over the second half of 2009. But while improved sentiment can provide a short-term lift to household spending, a sustainable boost in activity must eventually be backed up by improving consumer fundamentals such as income growth, falling unemployment and reduced debt burdens. To get a better sense of the trajectory of these household fundamentals, we looked at seven key macro-economic factors to construct a proprietary Consumer Capability Index.

Unlike a confidence survey which is based on the results of a subjective survey, this measure does not address the self- reported mood of Canadians, but rather their objective capacity to continue spending. The goal of this indicator is to shed light on consumers’ ability to spend as opposed to their willingness to spend.

Read the rest of the report here:
http://research.cibcwm.com/economic_public/download/feature3.pdf

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Tags: Confidence, Consumers, Economy, households, US