Tuesday, September 28, 2010

Confidence Not Cooperating

Improving confidence is typically seen as an important ingredient for a lasting economic expansion. This morning, the Conference Board released their monthly survey of consumer confidence, and it showed a decline to 48.5, the worst reading in seven months. Both of the main sub-components of the index fell to their lowest levels since February.

Focusing on the two sub-components reveals some interesting information. Typically, the “expectations” component bottoms and starts to recover earlier than the “present situation” component following recessions. As you can see on the chart below, that’s exactly what happened this time around (although expectations are also down now by almost 20 points since reaching a recent high in May). However, the present situation component is completely moribund, still scraping along the lows first reached in March 2009 and showing no sign of following the lead of the expectations component. You certainly wouldn’t guess that the recession ended in June 2009 by looking at this indicator.

The fact that confidence is faltering at present when we’re only about 15 months into this recovery is worrisome. As you might expect, the dour mood is likely very closely linked to the stagnant labor market. It’s hard for consumers to feel especially good with unemployment as high as it currently is. No wonder there has been a lot of speculation recently that the Fed is seriously considering additional measures to support the economy.

Chart: Consumer Confidence – Expectations (blue line) vs. Present Situation (black)