Consumer Confidence Up Housing Down

As the year comes to an end, there are just a few remaining economic reports due.. Most will have little effect on the markets.

Consumer Confidence is one of the few important reports expected that could impact the markets as the year winds down and might also whet investors’ appetites into the new year.

The Conference Board announced today that its consumer-confidence index jumped to 64.5 in December – the highest level in eight months – from a revised 55.2 in November. Economists were expecting the index to climb to 60.0. Consumer confidence has jumped nearly 25 points in the past three months and now sits at its highest level since April. Consumers are more optimistic that business conditions, employment prospects and their financial situations will continue to get better. While consumers are ending the year in a somewhat more upbeat mood, it’s too soon to tell if this is a rebound from earlier declines or a sustainable shift in attitudes. Consumer confidence is the driving force behind a thriving economy. If consumers spend, money begins to flow and the economy begins to improve. Recent data has shown that the US economy is improving but at a snail’s pace, if consumer confidence increases this could give a big boosts the economic recovery.

The current situation index rose to 46.7 from 38.3 and the future expectations index rose to 76.4 from 66.4, the board said. The percentage of people who expect more jobs to be available in coming months moved up to 13.3% from 12.4%.

The question is how will investors view these figures?

A strong consumer confidence report, especially at a time when the economy is lagging behind estimates, can move the market by making investors more willing to purchase equities. The idea behind consumer confidence is that a happy consumer – one who feels that his or her standard of living is increasing – is more likely to spend more and make bigger purchases, like a new car or home.

It is a highly subjective survey, and the results should be interpreted as such. People can grab onto a small situation that garners a lot of mainstream press, such as gas prices, and use that as their basis for overall economic conditions, fair or not. There are no real data sets here, and people are not economists, so they cannot be counted on to realize that, for example, because gas prices may only represent 5% of their expenses, they should not sour their entire economic outlook.

Because of its subjective nature and relatively small sample size, most economists will look at moving averages of between three and six months for consumer confidence figures before predicting a major shift in sentiment; some also feel that index level changes of at least five points are necessary before calling for the reversal of an existing trend. In general, however, rising consumer confidence will trend in line with rising retail sales and, personal consumption and expenditures, consumer-driven indicators that relate to spending patterns.

Regional breakdowns of the data are valuable for seeing the breadth of sentiment across the country, which can be a useful factor in the real estate market, along with indicators such as housing starts and existing home sales. This month there has been a divergence between housing starts and prices and consumer confidence, although improved consumer confidence can be the boost that the housing market needs to start moving from the bottom.

The S&P/Case-Shiller 20-city composite index fell 1.2% in October to moves its 12-month drop to 3.4%. After five straight months of gains starting in April, prices have started to cool. The gauge isn’t seasonally adjusted, and there is generally greater interest in buying homes during the spring and summer.

Nineteen of 20 cities saw price drops during the month, with 11 falling by 1% or more. The market in Atlanta has had two terrible months, with a 5% drop in October after a 5.9% decline in September.
Strengths

• One of few indicators that reaches out to average households
• Has historically been a good predictor of consumer spending and, therefore, the gross domestic product

Weaknesses:

• A subjective survey with no physical data sets
• Small sample size (only 5,000 households)
• Survey results may contradict other indicators, such as GDP and the Labor Report

Sentiment indicators can carry a lot of weight – there are so few that are standardized like Consumer Confidence and, in the final analysis, the happiness and spending ability of John Q Public is the most important determinant of an expanding economy.