Tuesday, May 25, 2010

The Consumer Remains Unfazed

Although hardly the most important item on the markets' mind this morning, the strength in the May Consumer Confidence Index deserves some attention, at least briefly.

The surge in the index to 63.3 from 57.7 in April is a testament to the steadily improving domestic economic environment and, particularly, of the consumer sector. The expectations component turned out the biggest increase, up 7 points to 77.4, while the current conditions component rose 2 points to 30.2. The spike is even more remarkable in that it took place in the midst of a period where the stock market's performance has been dismal.

Source: Action Economics

Both of the key barometers of consumer psychology (Conference Board's Consumer Confidence Index and the Reuters/University of Michigan Consumer Sentiment Index) are highly sensitive, on a short-term basis, to stock market behavior and sharp swings in gasoline prices. Over a somewhat longer period, perceptions of the job market situation tend to be more influential in driving those measures. While it is true that job market conditions have improved markedly in recent months, they have not done so in a spectacular enough way, as evidenced by the near cycle-high unemployment rate of 9.9%, to fully justify the decidedly upbeat consumer attitudes that evidently overrun any anxiety associated with the recent stock market turmoil.

All in all, this means only one thing, that is that there has been a dramatic turnaround in the way the economic environment is perceived by households, and this fuels a sense of optimism and growing confidence in the future. It appears that consumers are less willing, at this point, to let significant short-term noise in the stock market shape their view of where the economy is headed. This speaks volumes of the credibility of the economic recovery's forward momentum- at least for as long as the global financial market anxiety does not transform itself in to a full-fledged crisis.

Looking ahead, and as the economic recovery unfolds further, the Consumer Confidence Index is bound to move much higher from its current, historically low, levels. However, the series may still suffer a modest pullback in June, particularly if the unsettled stock market environment persists. Furthermore, the University of Michigan Sentiment Index for the entire month of May (to be released Friday) may slip from its early-month reading of 73.3 to 72.0 or so, under pressure from the ongoing stock market erosion.

Anthony Karydakis

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