Yahoo Finance Should the Steep Decline in Consumer Confidence Worry Investors?
Why the Steel Industry Is in Double Trouble
Consumer confidence
In the previous parts, we analyzed the indicators in the construction sector. In this part of the series, we’ll discuss why the recent decline in the US consumer confidence index should bother investors in steel plays.
The US consumer confidence index fell steeply to 88.6 in May, as per preliminary readings. This was way below the final April reading of 95.9, and missed analysts’ expectations by a huge margin. The April reading was however revised upwards from the initial reading of 95.5.
Consumer confidence index
Consumer confidence data is compiled by the University of Michigan and Thomson Reuters, and is reported on a monthly basis. The Survey Research Center conducts the underlying survey, which consists of at least 500 telephone interviews involving a cross section of consumers in the continental United States.
The decline in consumer confidence is negative for steel companies
The previous chart shows the latest trend in the US consumer confidence index. The index held above 90 for five consecutive months preceding May. The sudden and unexpected decline in the US consumer confidence index is a source of concern for investors in steel companies like AK Steel (AKS) and POSCO (PKX).
AKS currently forms 4.5% of the SPDR S&P Metals and Mining ETF (XME) and 0.14% of the iShares Core S&P Small-Cap ETF (IJR). Globe Specialty Metals (GSM) currently forms 1.47% of XME’s portfolio.
One factor that is driving higher home and vehicle sales is higher consumer confidence in the US. In order to get into a long-term commitment like buying a house or a car, consumers need to have some degree of confidence about their future income. Meanwhile, it’s not only the US consumers who seem less confident. Their European counterparts also seem to be losing some of their confidence. We’ll discuss the recent trend in the Eurozone in our next part.
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