Tuesday, February 23, 2010

Consumer Confidence Plunges in February

The shockingly sharp decline in the Conference Board's consumer confidence index by more than 10 points to 46.0 in February is a stark reminder of the bumpy road that the economic recovery is facing.

Source: Action Economics

Although the drop in the index can be viewed as a payback for solid, back-to-back gains in December and January, the reality is that the magnitude of the drop is attention-catching. This is so, not only because it has left the series at its lowest level in 10 months but also because of the unnerving drop in the "current conditions" component to 19.4, which is the lowest in nearly 28 years. To add to the downbeat message of the February report, the "expectations" component nearly cratered this month, falling to 63.8 from 77.3 in January.

Anxiety over the job market's prospects remains at the core of consumers' seemingly bleak assessment of both current conditions and the 6-month outlook for the economy. On the face of it, such renewed concerns over job prospects in February run contrary to other evidence in the last few months suggesting that the pace of erosion in labor market conditions is slowing. A plausible, although still wanting, explanation here might be that the cumulative anxiety and frustration over the lack of any readily visible improvement in job growth and the lingering high unemployment rate are taking a toll on household psychology.

Still, the consumer confidence/sentiment measures are "soft" indicators and contain more than their fair share of noise. It is also true that, ultimately, psychology alone will not be the defining factor of what households will do in terms of spending, as this will be shaped by whether labor markets and associated income growth continue to improve. However, the report today is a vivid example of how the decidedly sub-par (by historical standards) pace of this economic recovery to date has failed to project a convincing message to all that an economic recovery is actually taking place at all.

Anthony Karydakis

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