What does that mean to the big picture?

Not surprisingly consumer confidence dipped slightly in September. Given that there has not been a big improvement in the unemployment rate most consumers likely still feel gun shy.

We have talked before about the virtuous or vicious cycle that exists between the stock market and consumer confidence. Typically there are no big corporate earnings announcements in September because it is so late relative to the June 30th second quarter end. What that means is that sans big earnings announcements and sans really uplifting economic data there is not much to drive the stock markets up. Like it or not, most people see stock market performance as a proxy for economic health.

What we need is for the third quarter to end; which it does tomorrow. Earnings reports are likely to be scintillating and beat expectations. A rise in the stock market is likely. Confidence should slowly spread economy-wide. At some point there will be enough business activity to encourage new hiring and that stubbornly high unemployment rate will start to come down. I feel that we are at least 18-24 months away from unemployment being around 7%. It’s my feeling that it’s going to be a long slog back to high employment.

What could derail my opinion from coming to fruition? An economic shock to the system such as an Israeli or U.S. strike on Iranian nuclear facilities that would dramatically and instantaneously raise oil prices. That would raise the price of everything in the economy since oil is (in) the bedrock of the economy. An increase in military operations in Afghanistan that would continue the public’s malaise with having been at war since 2001. The current War Against Terror (or whatever it’s called) has lasted twice as long as World War II for the U.S. A continued psychological depression on the part of the public would also lead to flagging consumer spending at that would also certainly upset the economy’s apple cart. There are of course more scenarios.

My personal feeling is that the Iranian situation is the most important to continue watching. Right now the Obama Administration is talking about sanctions, not airstrikes. However, the sources that I read state that sanctions will utterly fail because both Russia and China can circumvent any gasoline sanctions against Iran. Neither of those two countries at the recent UN Security Council meetings was on board with the sanctions. So if Obama is truly serious about curtailing Iranian development of its nuclear capability then a military option looks increasingly like the only option.

The Afghan situation is also tough and potentially intractable. Obama campaigned on the fact that the real war effort should be in Afghanistan but there is failing public support for yet more war (thankfully). So the question is whether or not he will fail to deliver on a campaign promise, but do the right thing – withdrawal. Or whether or not he will feel compelled to fight a war that no one is interesting in him fighting and that, frankly, looks unwinnable.

In conclusion, the consumer confidence situation is very fluid right now and it feels fragile. I am confident that the 3rd quarter earnings season should be enough to edge U.S. consumers toward feeling better about their lives. But you never quite know.

Jason