The consumer is back – US Consumer Confidence rose the biggest since late 2011. It came out at 98.1 when compared with 85.9 last month. Moreover, it cruised beyond expectations of 91.6, reflecting a strong optimism about what lies ahead for the US economy.
Why Is Consumer Confidence Important?
In economics, it is all about confidence. For example, if the population does not trust a central bank’s ability to maintain price stability, the value of the currency will decline precipitously. Similarly, central banks use consumer confidence levels to gauge future optimism and thus anchoring inflation expectations.
The Conference Board Consumer Confidence Index showed improvements in all areas. As it is a leading indicator of consumer spending, it paints a positive picture of future economic recovery.
When in a recession like the one we live in, any sign that may signal a turnaround is important. That is particularly true if the indicator is a leading and not a coincident or lagging indicator.
Even the Present Situation Index part of the Conference Board Consumer Confidence data, improved. It rose from 68.4 to 86.2, reflecting the confidence with which consumers face the current crisis.
The overall indicator is a survey of over three-thousand households in the United States. Respondents are asked to rate current and future economic conditions in terms of employment, business conditions, labor availability, and so on. The result compiles all the answers and offers a good proxy for the state of the US consumer.
The Expectations Index rose as well. This part of the survey deals with future expectations regarding income, labor, or business, offering a short-term perspective inside the consumer’s expectations. It rose from 97.6 in May to 106 in June, a staggering development considering the rise in the COVID-19 cases in the United States and the fact that many states are considering locking down again.
Have consumers turned the corner? Do they spend or are they ready to spend at pre-crisis levels? Unlikely.
The data, while encouraging, only reveals that consumers are less pessimistic about the short-term outlook. It may just be the result of people getting used to the new normal and realizing that one way or the other life goes on.
As long as economic conditions remain weak, the consumer sentiment will easily shift from optimism to pessimism, reflecting the ongoing uncertainty. However, we should not ignore one of the first recovery signs given by a leading economic indicator.