Is economic recovery gaining some traction? Yes, perhaps, if we go by the report released by the Conference Boardon Tuesday.According to the Conference Board, its Consumer Confidence Index (CCI) for the month of February jumped to the highest level since February 2008. The sharp rise is a reflection of growing consumer optimism on the short term, the Board says.

What is CCI?

First off, CCI is a qualitative indicator designed to measure the degree of consumers’ optimism on the state of the economy. The survey-based index measures the direction of economic movement based on what people feel. A higher CCI implies chances of increased personal consumption expenditures, indirectly resulting in economic growth.

Magnitude of Improvement

In February, CCI increased to 70.4 from 64.8 in January, representing the fifth consecutive monthly increase. This was also substantially ahead of economists’ expectation of 65.0. According to Lynn Franco, director of the Conference Board Consumer Research Center, the improvement indicates that consumers are again upbeat about the economy and their income prospects.

The forward-looking Expectations Index also increased to 95.1 from 87.3 in January. For the first time since pre-recession, the Index came in well above its long-run average of 92.0. As a result, we expect significant increase in spending going forward.

Unemployment: Still a Pain?

While CCI is at a three-year high encouraged by increased confidence on the short term, the unemployment level and business conditions still make a sad sight. Though unemployment fell 0.4% in both December 2010 and January 2011, the rate remains at a historic high of 9%.

However, according to the Conference Board, the assessment of the job market outlook remained positive. While consumers with the expectation of plentiful jobs in the upcoming months increased to 4.9% from 4.6% in January, folks anticipating fewer jobs decreased to 45.7% from 47.0%.

Government Efforts: A Proper Pill?

Government efforts have clearly failed to address the unemployment problem to a good extent, with companies still grappling with weak financials. The economic volatility also continues to take its toll on banks. There have already been 22 bank failures this year, preceded by 157 in 2010. Aggravating loan losses on commercial real estate are expected to result in hundreds of bank failures in the forthcoming years.

Also, the bank failures have set a consolidation trend in the industry. When Washington Mutual was in the red in 2008 and was branded as the largest bank failure in the U.S. history, it was acquired by JPMorgan Chase & Co. (JPM). The other major acquirers of failed institutions since 2008 include U.S. Bancorp (USB) and BB&T Corporation (BBT).

If the current pace of consolidation continues, we will see the emergence of a handful of large banks. As a result, the overall economy will not remain unscathed and job creation will become vulnerable.

A Long Way to Go

Though the CCI reached its highest point in three years, it remained well below the more than 90.0 benchmark of a stable economy. In January 2008, the index came crumbling down below the stable economy level and touched an all time low of 25.3 in 2009. Though improving business conditions will power consumer confidence and accelerate business spending, there remain significant reasons to be wary, given the high unemployment rate and fears of heightened inflation.

We can see that borrowing is still decelerating (though at a slower pace), reflecting the fact that consumers are still not ready to return to the pre-recession spending level as their assessment of future conditions keeps them slightly cautious.

Concerns also persist about the self-fulfillment of such prophesies; they can end up as regressive expectations. Sometimes predictions misguide consumer behavior, precipitating an economic downturn.

 
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