US: Consumer Confidence

Tue Feb 24 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Consumer Confidence - Level 99.1 95.0 to 109.0 96.4 102.9 103.8

Consumer confidence spiked in January and has since been coming down, indicated by the twice-a-month consumer sentiment report and by today's monthly consumer confidence index which fell 7.4 points to 96.4 from a revised 103.8 in January which was a 7-1/2 year high.

The dip is centered in the expectations component which fell a very steep 9.8 points to 87.2. The second main component, present situation, also dipped but less severely, down 2.7 points to 110.2. Here, a closely watched sub-component, jobs currently hard to get, rose 1.6 percentage points to 26.2 percent which is mild indication of weakness for the monthly employment report.

Other readings include a 1 tenth uptick in 12-month inflation expectations to 5.0 percent which is very low for this reading. Buying plans are soft especially for autos.

The decline in expectations is worth taking note, specifically reflecting not a rise in the number of pessimists but a decline in the number of optimists. Several reports this month, including today's PMI services flash and last week's Empire State and Philly Fed reports, also show significant declines in optimism. The reason for the lack of optimism is impossible to pin point though weather through much of the country has been severe and may be freezing spirits, at least for now.

Market Consensus Before Announcement
The Conference Board's consumer confidence index was up very sharply in a January reading and recovery best of 102.9 that was outside the Econoday forecast range (93.5 to 100.0). Gains swept most readings including a 12.7 point surge in the present situation component to 112.6. Here, the jobs-hard-to-get subcomponent showed special strength, down 1.6 percentage points to 25.7 percent in a reading that proved to be a positive indication for January's employment report. The expectations component also showed strength, up 7.9 points to 96.4 with the income subcomponent up sharply. Strength in expectations for future income points to a combination of strength in the jobs market, the stock market, and also the positive effect of lower gasoline prices.

The Conference Board compiles a survey of consumer attitudes on the economy. The headline Consumer Confidence Index is based on consumers' perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income. Three thousand households across the country are surveyed each month.

The Conference Board changed its polling company in 2010. The current polling company is Nielsen Co. with the former being TNS Inc. The switchover reference month for the new data is November 2010. Because of the change in the polling service (even though the questions in the questionnaire are the same) the data are not completely consistent and November 2010 should be considered a break in the series. In general, while the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month.

The pattern in consumer attitudes can be a key influence on stock and bond markets. Consumer spending drives two-thirds of the economy and if the consumer is not confident, the consumer will not be willing to pull out the big bucks. Confidence impacts consumer spending which affects economic growth. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Consumer confidence did shift down in tandem with the equity market between 2000 and 2002 and then recovered in 2003 and 2004. In 2008 and 2009, the credit crunch and past recession led confidence downward with consumer spending contracting in tandem. More recently during the economic recovery, consumer confidence has edged back up but has been outpaced by improvement in spending.

Since consumer spending accounts for such a large portion of the economy, the markets are always eager to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend. It's easy to see how this index of consumer attitudes gives insight to the direction of the economy. Just note that changes in consumer confidence and retail sales don't move in tandem month by month.