No Double Dip Recession. What Does Consumer Confidence Really Mean?

Looks like the double dip recession predicted for the U.S. in three consecutive summers will again fail to arrive at the party.

Construction:

• The annualized level of total housing starts in September was up 15% from August, reflecting some strengthening from this summer's trough. The biggest driver of monthly gains was a pick-up in multi-family starts, which grew by 51% on an annualized basis from August to September.

Retails Sales:

• U.S. retail sales up 1.1 percent in September

 Employment:

• The four-week average of weekly unemployment claims declined this week to 403,000. This is the lowest level for the 4-week average of weekly claims since April

While the recovery remains exceptionally weak, it does not appear that we will face a second recession in the near future. This assumes (a very big assumption) that we do not face any additional policy headwinds from Washington D.C. leading up to the super budget committee deadline. It also assumes that Europe will continue to kick the can down the road, which will lead to continued volatility in the stock markets with minimal impact on the U.S. economy.

One weak area is consumer confidence, which slumped in October to the lowest level since the recession. The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 45, the worst reading since February 2009.

The weakness in consumer confidence is more a function of the political climate and lack of faith in political leadership rather than a barometer on the current state of the economy.

If consumers have confidence in the political leaders who shape economic policy, this may enhance their confidence in the future of the economy. If people believe that political leaders are incompetent, this may lead to a lack of confidence in the economy. Since the public's confidence in our leadership in Washington is at all time lows, I am opting for the latter scenario.

While politicians try to influence both the economy and economic sentiment, much of their effort has little direct influence on the economy, but it may well have an impact on economic sentiment. Sentiment can also be influenced by poll respondents’ tendency to view the economy as something separate from their own personal financial situation. Quite often, respondents to polls will have a rather dour outlook on the economy while they rate their own economic situation as good. I often hear focus groups participants say, “I’m doing okay, but my neighbors and people in my community are really struggling.”

Consumer confidence is an important part of the picture that typically says more about the mindset of the public instead of the current dynamics of the economy.