Stock markets today are roaring ahead (Dow 30 up 208.36, 2.5%; S & P 500 up 23.31, 2.6%; etc.) in the wake of several news stories. At 10:44 this morning, the Bloomberg terminal featured the following two headlines, in this order:
- Consumer Confidence in U.S. Increases to the Highest Level since September.
- Stocks in U.S. Extend Advance as Consumer Confidence Index Tops Estimates.
A related story on the terminal had the following title, “Consumer Confidence Soars in May.”
Before we get positively giddy, let’s step back and take a look at what’s really going on. I don’t know what we’re going to find at this point, just that my skepticism of headlines persists–especially when they seem to pinpoint reasons for very broad actions, such the motivations behind the 689,000,000 shares that have traded hands on the New York Stock Exchange today.
Economists were looking for a survey reading of 42.6%, while the actual result was 54.9%. In addition, the prior reading of 39.2% was revised upward to 40.8%. The survey asks respondents the following questions:
- Assesment of current business conditions
- Expected business conditions in six months
- Current employment conditions
- Expected employment conditions in six months
- Expected family income in six months.
For each question, a respondent can answer Positive, Negative, or Neutral. The positives are divided by the sum of negative and neutral responses to arrive at the released figures.
In the chart below, the blue line represents the Expectations Index, while the orange line represents the Current Situation index.
As is typical, the Expectations index rose quite sharply (from 51.0 to 72.3), while the Current Situation index rose more modestly (from 25.5 to 28.9). This may be an example of the impact of the media upon consumers, namely that we usually fear more for our neighbors’ losing their jobs; not ours.
While the expectations index is prone to fits and starts–whether in recessions or not–but especially in the case of recessions, the current situation index had just one false start, in the 1973-1975 (April 1974; keep that date in mind) recession. That’s a good thing.
What has driven the rebound in consumer confidence? Even if the average consumer had some idea of what Durable Goods Orders are, he or she still wouldn’t understand what has many Wall Street folks worked up, the idea of a slower deterioration in the economy. Ben Bernanke refers to it as “green shoots.” Others call it an improvement in the second derivative. Something tells me the guy down the street from you can’t figure out where those folks are comign from. There’s a good chance that all he knows is that his 401(k) should look better than it did a month ago. Indeed, it turns out that all Joe/Joyce Consumer needs to see are rising stock prices to spur a boost in confidence. Note, in the chart below, that an upturn in stocks (dashed vertical line) preceds an upturn in confidence (yellow circles).
- On March 9, 2009, stocks were being traded like the world was going out of business.
- That was followed by some better than expected news, which pushed stocks up a bit.
- Then the banks reported good albeit ephemeral earnings, and stocks were off for the races.
To be fair, there is a real loop effect to all of this that affects the real economy. It goes like this:
- A confident consumer (2/3 of the economy, remember?) can feel more confident about spending money.
- That can force retailers and others to have to restock their shelves (recall from previous notes that they’ve skinnied inventories way down).
- Along the way some folks get called back to work, and that comes with attendant benefits: their incomes rise, they feel more confident, unemployment peaks, and so forth.