The jump in May consumer confidence helped spark an impressive equity market gain on Tuesday but be warned that the factors that determine confidence are far more diverse and volatile than those which help determine consumer spending.
The gain in May confidence left the strongest level in eight months as the forward looking expectations component rose to a 17 month high of 72 from the 27 low of February. The three months of gain signal the start of an expected recovery though the level still stands -35% below the lowest level of the last recession.
Clearly the improvement in the consumer psyche is great news but don't expect it to lead to a quick rebound in consumer spending. Confidence is rising given the surge in the equity markets and the start of stabilization seen in the economy. Varied factors such as oil prices, terrorism, unemployment, global tensions and interest rates are also known to swing consumer confidence.
Consumer spending, meanwhile, is largely driven by income growth and to a lesser extent household wealth. These factors haven't yet shown a turn in direction. Personal income is up just 0.3% from a year ago given the -1.2% annual decline in salaries (read falling payrolls). Household net worth (i.e. wealth) fell -$11 trillion in 2008 given the plunge in equity and home prices. That massive decline also leaves most economists expecting consumers to continue to boost savings rather than return to the conspicuous spending of a few years ago.
Tax refunds and the reduction in payroll taxes which came with the fiscal stimulus have provided some lift in the monthly data but the uptrend in consumer spending will take longer to develop and be far less dramatic than the turn in consumer attitudes.
Comments