Consumer Confidence: Why Do We Care

Why Investors Care About Consumer Confidence:

The pattern in consumer attitudes and spending is often the foremost influence on stock and bond markets. 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. Consumers became more pessimistic in 2005 when gasoline prices surged.

Consumer spending accounts for more than two-thirds of the economy, so the markets are always dying 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. With this in mind, 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.

Current Consumer Confidence Data
The Conference Board Consumer Confidence Index, which had declined sharply in February, fell further in March. The Index now stands at 64.5 (1985=100), down from 76.4 in February. The Expectations Index declined to 47.9 from 58.0. The Present Situation Index decreased to 89.2 from 104.0 in February. The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.

Says Lynn Franco, Director of The Conference Board Consumer Research Center:

Consumers’ confidence in the state of the economy continues to fade and the Index remains at a five-year low (March 2003, 61.4). The decline in the Present Situation Index implies that the pace of growth in recent months has weakened even further. Looking ahead, consumers’ outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon. The Expectations Index, in fact, is now at a 35-year low (Dec. 1973, 45.2), levels not seen since the Oil Embargo and Watergate.

Consumers’ assessment of present-day conditions weakened further in March. Those claiming business conditions are “bad” increased to 25.4 percent from 21.3 percent, while those claiming business conditions are “good” declined to 15.4 percent from 19.1 percent. Consumers’ appraisal of the job market was also more pessimistic than last month. Those saying jobs are “hard to get” rose to 25.1 percent from 23.4 percent, while those claiming jobs are “plentiful” decreased to 18.8 percent from 21.5 percent.

Consumers’ short-term expectations also deteriorated further in March. Those expecting business conditions to worsen over the next six months increased to 25.4 percent from 21.6 percent, while those anticipating business conditions to improve declined to 8.1 percent from 9.7 percent in February.

The outlook for the labor market was also more pessimistic. Consumers expecting fewer jobs in the months ahead increased to 29.0 percent from 28.0 percent, while those anticipating more jobs declined to 7.7 percent from 8.9 percent. The proportion of consumers expecting their incomes to increase declined to 14.9 percent from 18.0 percent.

Source: The Conference Board & Bloomberg

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