Consumer confidence much worse than expected

Consumer confidence was significantly weaker than expected, falling to 52.9 in June from 62.7 in May. The present situations index deteriorated to 25.5 in June from 29.8 in May, while consumer expectations declined to 71.2 from 84.6.

Consumers’ assessment of labor market conditions weakened in June--the net jobs “plentiful” less jobs “hard to get” index weakened to -40.5% in June from -39.3% in May.

BOTTOM LINE

While the decline in consumer confidence will no doubt feed fears of a double-dip, we have long held that consumer confidence has no independent predictive power over consumer spending once the fundamentals of jobs, income, and wealth are factored in (interestingly the Lex column in today’s Financial Times argues the same point citing several academic studies). Confidence has double-dipped in the last two recoveries (in early 1992 and early 2003) without the economy falling back into recession and the June pullback in confidence is far less severe than either of those two episodes. Furthermore, we think that the response to the oil leak in the Gulf of Mexico is depressing confidence. First, we note that the employment indicators posted only a very modest drop compared to the decline in overall confidence. Second, we note that the three regions that have states affected by the spill posted the largest declines in confidence in June. Third, confidence plunged in September 2005 following the perceived inept response to Hurricane Katrina. As a result, we do not think that the consumer confidence data are pointing to a double-dip in the economy or consumer spending.

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