Wall Street was pleasantly surprised yesterday when the Conference Board Consumer Confidence numbers came in higher than expected. The consensus estimate expected a decline from 101.3 in August to 96.2 in September, but the actual number came in much higher at 103.
To put this in perspective, a rating of 100 indicates that consumers are just as confident now as they were in 1985. The CB arbitrarily chose 1985 as a benchmark because the economy was neither at a peak nor a trough that year. This means that yesterday’s reading of 103 indicates that consumers are more confident now than they were in 1985.
Of course, that doesn’t really give us that much perspective. To turn yesterday’s number into something usable, we have to look at it in comparison to where consumer confidence has been during the past 10 years.
As you can see in Consumer Confidence chart below, consumer confidence cratered below 30 in 2009 and has been steadily increasing — with a short pullback in 2011 — for the past six years.
Yesterday, the index hit its highest level since the beginning of the recession. It still has a little bit further to go before it reaches its July 2007 pre-recession high of 112.6, but the headline number looks strong.
So why do traders care so much about consumer confidence? They care because consumers have an enormous impact on the United States’ gross domestic product.
Looking at part of the final GDP report for the second quarter of 2015 from the Bureau of Economic Analysis in Fig. 2, you can see that the U.S. economy enjoyed a GDP of $17,913.7 billion. Of that, $12,228.4 billion — or 68.3% — was generated by personal consumption expenditures.
Most of the PCE was spent on services — $8,250.2 billion — as opposed to goods — $3,978.1 billion — but whether consumers are spending on housing and utilities or motor vehicles and parts, the U.S. economy needs confident consumers in order to grow.
Here’s the thing. While the headline Consumer Confidence number looks good, the picture doesn’t look quite so rosy once you dig into the numbers.
You see, when the CB is surveying households, it asks how consumers feel not only about present economic conditions (which gets calculated as the Present Situation Index) but also about future economic conditions (which gets calculated as the Expectations Index).
For September, the Present Situation Index climbed from 115.8 to 121.1, which is good news. However, the Expectations Index declined slightly from 91.6 to 91.
This tells us that consumers are skeptical of economic conditions improving much during the next six months. This could make Wall Street nervous, as traders always want to know what is going to be happening six to 12 months from now.
While traders were encouraged to see consumer confidence rising, they know that one of the primary drivers of confidence is the employment outlook. On the one hand, if consumers believe that they are going to have a job in the future, and that their income potential is rising, they will generally be more confident. If, on the other hand, they are worried about their job and have no hope of making more money in the future, consumers will generally be less confident.
That’s why all eyes are going to be on the nonfarm payrolls number and other employment data from the Bureau of Labor Statistics on Friday. If the numbers come in strong, coupled with a strong consumer confidence number, traders may have enough courage to buy the dip.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
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