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Investors Again Look Through Consumers’ Gloom

Michael Santoli

As privately compiled economic numbers go, the Conference Board's monthly consumer confidence index enjoys a pretty high profile. Maybe that's because its name promises something essential about the prospects of an economy that is commonly said to be 70% reliant on household consumption patterns.

Yet the data in recent years have been of little use either in divining the fortunes of retailers and restaurants, or in handicapping stock prices in the day or month they are released.

Tuesday's unexpectedly steep drop in consumer confidence well below forecasts and to its lowest level since November 2011 illustrates how the number speaks quite softly in the market. The S&P 500 index, as is its recent habit, is drifting gently higher. And the Consumer Discretionary Select Sector SPDR fund (XLY) was off marginally, a few pennies from its all-time high. The 10-year Treasury note, meantime, held its recent backup in yields toward 1.99% rather than declining as it would if fresh consumer stress were inferred.

Recession-Level confidence

Consumer confidence has been bumping along at levels that used to be associated with recessions or the immediate aftermath of an economic downturn. As Doug Short of Advisor Perspectives points out, even though the economy has been growing for three and a half years following the 2008-2009 recession, the latest reading of 58.6 is lower than all but 12% of monthly results in the 36-year history of the data.

A similar pattern of stubbornly downbeat consumers prevailed in the years after the 1990 recession, and to a lesser degree after the setback of the early 2000s, albeit at slightly higher levels than the recent trend. This is at least in part a reflection of the perceived -- and, for many, actual -- scarcity of job opportunities in this, the third supposed "jobless recovery" in 20 years.

In the early '90s example, at least, confidence remained sluggishly low for three years, until it rocketed higher in late 1993, as the economy and job market accelerated in what felt to many a sudden lurch. This was such an extreme move that prompted the Federal Reserve to rush out an interest-rate hike in February 1994. Much chatter has risen lately about that 1994 episode among folks who have turned wary of the chance that today's Fed might be forced to withdraw its extraordinary monetary generosity on short notice. This seems profoundly premature.

Consider that February 1994 was the last time the U.S. unemployment rate was declining to 6.5%, and core inflation was picking up. That 6.5% level is the new jobless-rate threshold the Fed has set for determining when it will re-evaluate its present rate stance. We'll get there sometime late next year, if we're lucky; the Fed itself figures it'll be in 2015.

No doubt the latest confidence number was weighed down by the loud and suspenseful fight ahead of the "fiscal cliff" at year end. Yet there also appears to be a long-term decline in the typical, expected level of professed confidence. Whether because we are an aging, jaded country -- or simply because the narrative of lowered economic expectations and unstable government finances dominate -- consumers don't confess to being as bold as they used to.

Still, this doesn't seem to keep them from spending what they have, or investors from looking past the gloom.