Consumer Sentiment: Struggling Forward

Consumer views of current economic conditions resumed their struggle forward this week, with the weekly Consumer Comfort Index inching back near the high end of its recent range.

The index stands at -41 on its scale of -100 to +100, far below its 25-year average, -14, and indeed still below -40, where it’s been mired for a record 146 weeks. But, despite ups and downs, there are several indications of gradual advance:

  • The CCI was below -41 for all of 2009 and reached -41 just three times in 2010 – but it’s already matched or exceeded this level twice in just the first month of 2011.
  • While the index averaged -48 in 2009 (its lowest on record), it advanced slightly to -46 in 2010, and so far this year has averaged -43 – small progress, but progress nonetheless.
  • Since hitting its record low, -54, in December 2008, the CCI has correlated with the passage of time at a robust .61; as the weeks have passed, it’s slowly gained.
  • Last month’s economic expectations measure – maintained separately from the current-sentiment CCI – was its least pessimistic in more than eight years. 
  • The index correlates with the Dow Jones Industrial Average at a remarkable .83 (after detrending for time) – and the Dow today closed above 12,000 for the first time since June 2008.

The CCI, produced by Langer Research Associates, is based on Americans’ ratings of their personal finances, the buying climate and the national economy. Forty-six percent now rate their finances positively, matching its average last year, and 28 percent call it a good time to buy things, a scant 2 points above its 2010 average. While just 14 percent rate the national economy positively, that’s 4 points better than its 2010 average, and has been in double digits for 12 weeks straight, matching the longest run in double digits (set last spring) since fall 2008. 

Even with the general upward trend, there could be a long road ahead. After the last major recession in 1991-92, it took the CCI more three and a half years to reach its pre-recession levels. Now, given how low it’s been and how slowly it’s advancing, it would take the CCI 10 years at this pace to regain its current long-term average.

The stubbornly sluggish progress on confidence may help shed light on the slower-than-expected GDP growth, reported last week to have been a lower-than-projected 3.2 percent in Q4 of 2010. As noted previously, changes in consumer confidence often anticipate a corresponding change in GDP; the correlation between quarterly CCI and the GDP one quarter in the future is .66 (after detrending for time); at two quarters out this relationship grows to .69 and at a year it’s .71.  

While confidence is certainly not the only factor that anticipates GDP, the fact that the CCI averaged a dreary -45 in the last three quarters of 2010 suggests something less than a large spike in GDP coming in Q1 2011.

Analysis by Julie Phelan, Research Analyst, Langer Research Associates.

Click here for tables with this week’s CCI data.

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