The Great Recession may have ended in 2009, but according to the December 2014 Consumer Confidence Index released by the Conference Board, consumers are just now reaching pre-recession levels of optimism.
December consumer confidence was 92.6 (the 1985 reference equals 100). This continues an overall upward trend since the 2009 trough of 25.3 and represents the highest consumer confidence number since the 104.0 registered in February 2008.
Other indicators echo the optimistic mood. In December, the University of Michigan Consumer Sentiment Index reached its highest value in eight years, and the U.S. Economic Confidence Index from Gallup broke into positive territory for the first time in that same timespan.
However, other data in the Confidence Index indicates that optimism has improved but may flatten out in 2015. Perceptions on jobs and the business outlook are continuing to improve, but the expectations for six months in the future are not.
The percentage of respondents classifying jobs as plentiful came in at 27.7% in December while those who thought jobs would be plentiful in six months dropped to 16.9%. Likewise, 24.8% consider business conditions to be good now, but only 18% think conditions will be good in six months.
This does not reflect pessimism, just an acknowledgment that times are better but a reluctance to go all in with economic recovery. The categories with the largest increases and largest overall totals were those expecting jobs and business conditions to be the same in six months.
What does the consumer confidence value mean for the U.S economy? In many ways, it depends on how you define “the economy”. Is it the stock market, gross domestic product (GDP), or your personal status (as well as those around you)?
The Consumer Confidence Index is generally considered a lagging economic indicator, meaning that it reflects the response to economic changes instead of predicting them. This is why consumer confidence was still high in February 2008, even as the plunge into recession was in its initial stages. For this reason, moving averages and trends are more meaningful than individual data points.
The effect on GDP is tangible, since around two-thirds of the real GDP is driven by consumer purchases. Confidence does not always correlate to sales, but continuing positive trends like the one we are in now may spur manufacturers to increase their output based on expected increases in demand.
Indeed, the graph of the Industrial Production Index from the St. Louis Fed tracks reasonably well with the Consumer Confidence Index since mid-2009. As long as consumers follow through on their optimism and purchase more goods and services, the upward economic cycle will continue.
However, if results change and both the current consumer confidence number and the six-month projection drop for several months in a row, manufacturers are likely to pull back on production and reduce inventory, expecting lesser demand.
The effect on equities is less straightforward, but consumer confidence trends can have a psychological effect on the market. Investments in equities may rise with good consumer confidence numbers even though they do not always correlate with PCEs (personal consumption expenditures).
It is hard to separate a core consumer confidence value reflecting a stronger economy from the subjective benefits for most Americans caused by temporarily lower gas prices – and it may be pointless to try. What we can say is that the current mix of economic news leaves Americans feeling better about the economy than they have in years, but still a bit skeptical that the recovery will be strong and long-lasting.