Consumer Confidence Rises, But Longer-Term Doubts Persist
Consumers are a fickle bunch. But fickle as they may be, there’s no question their impact on the American economy is substantial.
Simply put, confident and optimistic consumers tend to spend their money more freely, which ultimately powers our economy forward. Consumer spending accounts for roughly 70% of our nation’s entire economic growth. Any increase in consumer demand for goods and services must be accompanied by an increase in production and employees to meet that demand. For employees, this translates to rising wages and greater disposable income. For businesses, economic growth means greater profits.
Released each month by The Conference Board, the Consumer Confidence Index (CCI) is a key measure of consumer optimism. The index has a benchmark of 100. Any level above 100 indicates an optimism by consumers on jobs, income and the economy. Below 100 conveys pessimism.
On Tuesday, the CCI for August was reported at 103.3, up from the 101.9 reported in July. Though it marks the highest level in six months, a reading of 103.3 conveys that Americans are only slightly optimistic. Dana Peterson, Chief Economist at The Conference Board, notes that “Consumers continued to express mixed feeling in August.” Peterson’s comments reflect the continued divergence in consumer optimism between short-term and longer-term expectations.
The CCI is made up of two components. The first is the Present Situation Index, which measures consumers’ degree of confidence right now. The second is the Future Expectations Index, which measures consumers’ outlook over the next six months.
The Present Situation Index in August was reported at a very high 134.4, up from 133.1 in July. This high level of current optimism is driven by consumers feeling quite confident about short-term business conditions.
Conversely, the Future Expectations Index is still very low at just 82.5. The main culprit behind this pessimistic longer-term outlook is a weakening labor market. In July, the national unemployment rate jumped to a three-year high of 4.3% while annual wage growth fell to a three-year low. Just 16.1% of consumers expect more jobs to be available six months from now. Likewise, just 16.9% expect their incomes to increase.
The recent jump in consumer confidence is certainly a positive event. But at 103.3, the CCI is just barely above the benchmark 100-level which serves as the dividing line between optimism and pessimism. Going forward, that confidence appears on shaky ground and will likely be heavily dependent on the fate of the U.S. labor market.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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