NEW YORK (CNN/Money) - Tuesday's "strong" reading on consumer confidence, like a car with a funky clutch, should be handled with extreme caution. Read the report carefully, and you start to wonder if the consumer might be headed for a breakdown.
Confidence hit a six-month high in May, according to the closely-watched report from the New York-based Conference Board. That's in line with the University of Michigan's monthly report on consumer sentiment released last week. In addition, the weekly ABC/Money Magazine index of Consumer Comfort posted its first advance after three straight declines.
What's going on?
The main reason that the Consumer Confidence index rose to 83.9 in May from 81.0 in April is that the Expectations index jumped sharply. In other words, people are hoping and believing the economy is going to be healthier six months down the road. In particular, more people say that jobs will be "more plentiful."
But the same group of 5,000 people surveyed by the Conference Board are much less optimistic about what's happening in the economy right now: the index of the Present Situation fell to 67.9 in May from 75.2 in April. The results were the mirror image of Expectations: more people said business conditions are bad, and more people said jobs are harder to get.
Recently by Kathleen Hays
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Put some of these numbers in perspective before you agree with the glib assessment of today's report as "strong." The 12-month average of Expectations is 96.6 so at 94.4 in May, expectations are back to a respectable level. But the 12-month average for the Present Situation index is 92.7, so at 67.9 in May that reading is still in the basement.
Now that makes the recent decline in the weekly Consumer Comfort index make more sense because it tracks what's going on in the economy today, asking just three questions about the current state of the nation's economy, personal financial conditions, and buying plans.
That decline dovetails with the UBS/Warburg Investor Optimism Index, which dropped sharply in May after having roared up and out of the basement in April. When asked what is the biggest threat to the investment climate, 28 percent said their biggest worry is a prolonged economic downturn -- and that topped every other worry from terrorism to taxes.
People remained worried about their jobs and the economy. And history shows that if conditions don't start improving in the present, then people's expectations for the future will start to dim again, and we'll see confidence head lower again. That doesn't mean they won't spend, it doesn't mean stocks can't continue to move higher.
But it will mean confidence is not moving in the right direction for those who want more certainty that the economy is shifting into a higher gear and staying there.
Kathleen Hays anchors The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she is also a regular contributor to Lou Dobbs Moneyline.
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