Consumer confidence, or not?

This morning the Conference Board reported its monthly consumer confidence number.  Data gathered indicate that confidence fell to 52.5 from a 54.3 level in November.  Conference Board statisticians also calculate an expectations index that reflects consumer feelings about the future.  That number also fell from November’s 73.6 to a new reading of 71.9 in December.

One would think that a decline in confidence would lead to a lack of consumer purchasing on the part of consumers.  However, spending rose 5.5% in the 50 days leading up to Christmas according to Master Card Advisors Spending Pulse.  That level is higher even than it was pre-The Great Recession.  So what gives?

Analysis: I have said previously on the blog that consumer confidence is typically a lagging indicator.  The reason is that most consumers don’t express confidence in the state of things until they are already better.  Sadly, the average Joe and Jane Doe is a backward looking person, not a forward looking person.  Most people are living with memories of bad economic moments past, or not enjoying the present.  So consumer confidence usually doesn’t rebound until well after things are much better.

But consumers are spending money in amounts that they haven’t for years and years.  Clearly there is a sense of stability, if not confidence on the part of consumers.  This, again, is something that I have been writing about for many months.  In other words, it is progress when consumers don’t necessarily think things are going to get better (confidence), but that they won’t get worse (increased spending).

Let’s exit the mindset of the consumer and enter the mindset of the investor.  That consumers are spending at pre-recessionary levels is much more significant news than the confidence of those consumers.  It means that folks are starting to feel a sense of stability to the extent that they are opening their wallets up to spend.  That should increase the Consumer spending portion of gross domestic product – a full 70% of GDP typically.  In turn, that will lead to businesses increasing their orders and eventually their hiring.  Ultimately, businesses will then start hiring again to keep up with demand.  That will lead to a reduction in the unemployment rate – your average consumer’s big obstacle to feeling more confident.

Importance grade: confidence = 6; spending = 10; for all of the reasons named above, the increase in Holiday buying is a big deal.

Jason