Tuesday, 29 May 2012

May Consumer Confidence: The Third Month of Shrinkage

The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through May 16th. The 64.9 reading was well below the consensus estimate of 69.4 reported by Briefing.com and further below Briefing.com's more optimistic forecast of 71.0. This is a decline from last month's 68.7, which is a downward revision from the Conference Board's previously reported 69.2. In fact, this is the third consecutive decline, something that hasn't happened since Dec 2008-Feb 2009.
Here is an excerpt from the Conference Board report.
Says Lynn Franco, Director of Economic Indicators at The Conference Board: "Consumer Confidence fell in May, following a slight decline in April. Consumers were less positive about current business and labor market conditions, and they were more pessimistic about the short-term outlook. However, consumers were more upbeat about their income prospects, which should help sustain spending. Taken together, the retreat in the Present Situation Index and softening in consumer expectations suggest that the pace of economic growth in the months ahead may moderate."

Consumers' appraisal of present-day conditions deteriorated in May. Those claiming business conditions are "bad" increased to 34.3 percent from 33.2 percent, while those saying business conditions are "good" decreased to 13.6 percent from 15.5 percent. Consumers' appraisal of the job market was also less favorable. Those claiming jobs are "hard to get" increased to 41.0 percent from 38.1 percent, while those stating jobs are "plentiful" decreased to 7.9 percent from 8.4 percent.

Consumers have also grown less upbeat about the short-term outlook. Those expecting business conditions to improve over the next six months decreased to 16.6 percent from 18.5 percent. However, those anticipating business conditions will worsen decreased to 13.1 percent from 14.2 percent.

Consumers' outlook for the labor market was also less positive. Those expecting more jobs in the months ahead decreased to 15.8 percent from 16.9 percent, while those anticipating fewer jobs increased to 21.0 percent from 18.4 percent. The proportion of consumers expecting an increase in their incomes improved to 15.2 percent from 13.9 percent.   [press release]
The Recessionary Mindset
Let's take a step back and put Lynn Franco's interpretation in a larger perspective. The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it has now fallen below the 69.4 average confidence of recessionary months three years after the end of the Great Recession (based on the official call of the National Bureau of Economic Research).
The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing gauge of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today's reading of 64.9 is well below the 80.7 of the current regression level (19.6% below, to be precise).

It is interesting that the consumer confidence pattern since the NBER declared end to the recession is similar to the 36-month pattern following the 1990-1991 recession, although the current pattern has so far been at a lower confidence level. At an even higher level, there was also a two year period following the 2001 recession where confidence lagged. A common factor in all three cases is a "jobless recovery". To a great extent, Consumer Confidence is a proxy for unemployment problems. The rise in confidence in earlier this year had been concurrent with an improvement in the monthly unemployment numbers. The decline in confidence over the past few months underscores the Conference Board's findings of a gloomier outlook for the labor market.
On a percentile basis, the latest reading is at the 20th percentile of all the monthly readings since the start of the monthly data series in June 1977 and at the 14.6 percentile of non-recessionary months.
For an additional perspective on consumer attitudes, see my post on the most recent Reuters/University of Michigan Consumer Sentiment Index. Here is the chart from that post. There seems to be a bit of conflict between the Conference Board and Michigan results in recent months. The Sentiment Index has been moving higher while the Confidence Index has been dropping.

And finally, let's take a look at the correlation between consumer confidence and small business sentiment, the latter by way of the National Federation of Independent Business (NFIB) Small Business Optimism Index. As the chart illustrates, the two have been closely correlated since the onset of the Financial Crisis.

The NFIB index has been less volatile than the Conference Board Consumer Confidence Index, but it has likewise only partially recovered since the official end to the recession in June 2009.

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