October Consumer Confidence

Updated 19-Nov-09 19:26 ET

Highlights

The Conference Board Consumer Confidence survey took a turn for the worst as confidence tumbled to 47.7 in October from 53.4 in September. The consensus expected confidence to rise modestly to 53.5.
The weak recovery theory drove the present situation confidence index to its lowest level (20.7) since February 1983.
The expectations indicator declined to 65.7 from 73.7.

The drop in confidence shouldn't have been unexpected. The University of Michigan Consumer Sentiment index posted a similar decline in October as the preliminary reading declined to 69.4 from 73.5.
In fact, the shock to the market should not have been that confidence was much lower than expected but that consensus had expected an increase in the first place.
Consumer confidence numbers are highly correlated with gasoline prices, unemployment, the stock market, and media reports. Over the last month, gasoline prices have remained stable, unemployment reports look better as initial claims have declined, and the stock market has continued to rebound. These would point to an increase in confidence. However, the media has been harping constantly about the possibility of a weak economic recovery.
It seems many people are beginning to believe the media. Workers are understanding, that while the economic situation in aggregate is increasing, they may be hard pressed to see any of the benefits. Until many workers can experience some tangible benefit of the recovery, they may continue to believe that their situation is not getting better.
Please note, the decrease in consumer confidence does not necessarily translate into decreased consumption spending. The main drivers for consumption growth are current/expected income and available credit. The consumer still faces difficult constraints in both sectors which makes future consumption growth difficult.

Consumer sentiment indices get way too much attention. The simple fact is that sentiment does not correlate strongly with consumer spending and thus has little predictive value. Consumer spending correlates more closely with income. Sentiment tends to reflect well known factors such as unemployment rates and gas prices more than it predicts future spending patterns.

Category	OCT	SEP	AUG	JUL	JUN
Conference Board	47.7	53.4	54.5	47.4	49.3
Expectations	65.7	73.7	73.8	63.4	65.5
Present Situation	20.7	23.0	25.4	23.3	25.0
Employment ('plentiful' less 'hard to get')	-46.2	-43.4	-40.0	-44.8	-40.3
1 yr inflation expectations	5.3%	5.3%	5.4%	5.5%	5.9%