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August  27th, 2012

The Conference Board’s index of consumer confidence rose to 65.9 in July, having bounced off a 7-month low (62.7) in June. For August, economists expect the headline measure to remain close to the prior month’s reading (consensus 66.0) but as consumers face myriad threats such as rising gasoline and food prices, the November elections, potential tax and regulatory changes and a sudden drop in federal entitlements) dealers speak with conviction that consumer confidence is unlikely to improve to even the modestly higher averages in Q1 (67.5) or Q2 (65.3).

Toward the low end of the range of forecasts (63.0 – 68.0), economists at Societe Generale Cross Asset Research suppose the Conference Board’s measure will go the way of its peers. “With the exception of the rebound in the Thomson-Reuters/University of Michigan barometer, most consumer confidence measures that we track slumped from their reported July readings. We expect the Conference Board’s gauge to follow suit, shedding a little over two points to 63.8.” The only firm with a lower estimate is High Frequency Economics (e: 63.0), which wrote simply, “We expect last month’s surprising rise to be at least partly reversed.” They felt that the pattern on the S&P 500 (up 5% in the past month and 10% from the low point in early June) “suggests renewed upward momentum in confidence as well as activity indicators” but warned, that gasoline prices are on track to add 0.5 points to the rise in the overall August CPI, depressing real disposable personal income by a comparable amount. Still unclear is whether the stretch run of the election campaign will undermine or boost confidence. We are hopeful that reduced policy uncertainty will help lift growth in 2013, but fear, acrimony and uncertainty will hold back hiring and spending in coming months.”

At the other end of the forecast range, Credit Suisse Research and Analytics (e: 68.0, the high estimate in the Reuters survey of economists, primary dealers or otherwise) expects consumer confidence to rise “on better news flow”. The US Economics Team wrote, “Data on employment has been mostly better on the month- payrolls surprised to the upside, “News Heard on Employment” from the University of Michigan improved for the first time in three months. Elsewhere, retail sales broke its three month losing streak, the stock market is up, home builders are expressing more confidence, and the University of Michigan’s Consumer Sentiment advanced.”

One of three primary dealers at 67.0, Deutsche Bank Global Markets Research admitted Monday, “Consumer confidence remains depressed, but it is still up significantly from its lows of February 2009 (25.3) and October 2011 (40.9). We expect confidence to grind higher in an uneven fashion, owing to mildly rising home prices and more importantly to gradual healing of the labor market. The behavior of consumer confidence has roughly mirrored that of retail sales. For example, after large annualized gains in Q4 2011 (+8.4%) and Q1 2012 (+6.7%), retail sales fell last quarter (-1.0%) but have since rebounded in July (+10.2% annualized). If August consumer confidence remains near its current reading, it would not presage a sharp payback in consumer spending this month.”

Economists at RBS Securities (e: 67.0) believe that consumer confidence may have edged higher again in August after July’s modest bounce (which as they point out merely followed four straight declines). In their US Economics Weekly, RBS suggested, “In July, the rise in confidence was due entirely to brighter expectations for both future business and labor market conditions, while views of the present situation were little changed. In August, assessments of current conditions may have improved, given that the economic data over the last month have had a more upbeat tone. In particular, the relatively healthy employment data for July may have bolstered the confidence measure, given the relatively heavy emphasis of this survey on labor market conditions. In the University of Michigan preliminary consumer sentiment survey for August, the net percentage of respondents who reported hearing favorable versus unfavorable news on the labor market improved, and a smaller percentage of respondents in August expected unemployment to be higher in 12 months time. In any case, the recovery in consumer confidence over the near term is likely to remain gradual, given ongoing uncertainty over the elections, fiscal policy, and the economic outlook. While rising equity prices and the recent stabilization in home prices bode well for household wealth, the sharp upturn in gasoline prices over the last two months has been a worrisome development.”

Believing US households “continue to hesitate between hope and uncertainty”, Oddo Securities (no estimate) similarly pinpointed four core influences on consumer confidence: “a) The labor market: since the start of the summer, the news flow is a bit more encouraging than in Q2, with the decline in jobless claims and a rebound in employment. b) Inflation: gasoline prices have rebounded (+11% in two months). c) The 2013 budget outlook: uncertainty remains persistently high, at a time when the presidential campaign is entering its final phase. d) Asset markets: house prices have initiated a rebound and the stock market has made significant gains in the last three months. All told, there are two positive influences (a and d), and two negative influences (b and c), which do not signal a confirmed direction either upwards or downwards.”

Addressing both of this week’s consumer confidence surveys together, Wrightson ICAP wrote, “We don’t have any particular reason to expect much movement in the monthly household sentiment surveys this week. The Reuters/University of Michigan index surprised us mildly by rising 1.3 points (to 73.6) between the final July and preliminary August surveys. Not much has changed fundamentally in the last couple of weeks, so we expect the final August reading to be close to the preliminary estimate at 73.5. Our guess is that the Conference Board series will parallel the Michigan index for the month as a whole, and edge up roughly one point to 67.0.”

Beneath the headline of the Conference Board’s index of consumer confidence, dealers will pay particular attention to the inflation and labor components. Rising consumer food and fuels prices have the potential to sharply undercut the expectations index, which has a 60% weighting in the composite. Surveyed inflation expectations are on the Fed’s dashboard of key policy variables as well. Also be on lookout for a possible plunge in expected labor market conditions, the difference of those who (six months from now) expect more jobs and those who expect fewer jobs six months hence. So far in 2012, this measure has closely followed last year’s pattern and as a moderate increase in July 2011 was followed by an excessive 14.1-point drop a month later, dealers warn of over-interpreting another abrupt fall in August of this year. Keep in mind that roughly six months after consumers gave their most downbeat assessment of future labor market conditions, however, nonfarm payrolls knocked in their highest gains of the current year (+275k in January and +259k in February). Confidence measures are often not grounded in reality and as Citi Research aptly notes, “With the run up to the election and the uncertainty surrounding taxes and federal spending, confidence could become unmoored from more fundamental economic activity in coming months.”


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