The Conference Board’s Consumer Confidence index soared to 54.1 in August, up from 47.4 (upwardly revised from 46.6) and blowing away expectations of just a slight increase to 47.5. However, while improving, it still remains very low; 90 is about normal.
On the other hand, it sure beats the record low 25.3 set back in February. Since the Consumer represents over 70% of the economy, this is very good news indeed — especially coupled with the better news on housing prices we got today.
The total index has two major components: the present situation and expectations for the future. The big imporvement came on the expectations side, where that sub-index rose to 73.5 from 63.5. The increase in the present situation was more muted, and remains well below the expectations index at 24.9 up from 23.3 in July.
The difference between the present situation and the expectations components is even more apparent if we back up and look where they were just a few months ago. The present situation is actually lower than it was in April (25.5), but the expectations component is up from 51.0 then. As the graph below (from http://www.briefing.com/Investor/Public/Calendars/EconomicCalendar.htm) shows, the expectations part is nomally higher than the persent situation part, but the difference in direction is pretty extreme right now.
The rise in consumer confidence means that “animal spirits” may be returning to Main Street, not just Wall Street. If consumers feel more confident, they are more likely to go out and spend, particularly on big-ticket discretionary items. This will greatly help retailers and the companies that make discretionary items.
Even with the “Cash for Clunkers” program running out again, it means that some folks might just feel confident enough about the future to go out and buy a new car from Ford (F) or Honda (HMC), even if they are not bribed to do so by the Federal Government. It means they might go do their back-to-school shopping at The Gap (GPS) instead of the Salvation Army.
In the process, they will increase demand and put people back to work. Those workers will then have incomes that they can spend, further increasing economic activity. In short, a vicious cycle would be turning into a virtuous cycle.
As good as the news is about the increase, keep in mind that it is still at a very low level, with the present situations scraping along at near-record lows. Even the “good” expectations part has only climbed back to be in-line with the lowest levels seen during the last recession.
Yes, it is very good news, but keep it in perspective. More evidence that the recession is over, but I still think that the recovery is going to be a very slow and muted one. The economy remains brittle and any adverse shock to the system could easily put us back in the nightmare we were in last winter.
Still, the improvement we have seen since those dark days, and the trajectory we were on then has been remarkable. The medicine administered by the Fed (record low interest rates, big increases in the monetary base, backstopping everything in sight) and the Federal Government (the stimulus program, and — let’s face it — huge deficits) is working.
That doesn’t mean that everything is going to be great right away. In particular, the employment market is likely to remain weak until at least the first quarter of 2010, and the banking system still has major problems. The improvements we are seeing are in big part artificial, due to those extraordinary measures, which cannot be sustained forever without causing massive problems (inflation, a collapse in the dollar, public debt climbing over 100% of GDP, etc).
It remains to be seen if the patient will be able to get up and be healthy after the IV is pulled out of his arm. However, it sure beats the end of the economic world as we knew it, and just a few months ago that was a very real possibility.
With more than 25 years of experience as an analyst and portfolio manager, Dirk van Dijk is Zacks’ Chief Equity Strategist. He also manages the new long-term investing service, Strategic Investor.
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