The Daily Interview: A Little More Confidence Is Just the Ticket

The Conference Board's March consumer confidence index heartened traders yesterday, coming in at 117, well above the expected 104.5 and February's 109.2 level.

John Davidson Chief Investment Officer Circle Trust

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But don't break out the champagne just yet. The number indicates more of a leveling off in confidence than a rally, says John Davidson, chief investment officer of Circle Trust, which supervises $11 billion in institutional money. But in today's Daily Interview, Davidson also says the numbers were just high enough to keep the bears at bay and just low enough to keep Mr. Greenspan and his colleagues in the rate-cutting business.

TSC: Do you take the higher consumer confidence index is an indication that consumer confidence may be rallying?

Davidson: It's not a bounce in the confidence as much as an indication that a floor has been reached. Remember, the Conference Board consumer confidence index was at 140 a year ago. The last time it was at 117 was at the end of 1996.

But at least consumer confidence seems to have found a base, and the reason it may be stabilizing is because while we have a weakening jobs situation, unemployment is still fairly low at 4.2% and we still have a positive GDP . If you place the number of jobs eliminated in January against the number of jobs created, you have 240,000 net new jobs in January and 135,000 in February.

TSC: Should traders and investors be heartened by this moderate rise?

Davidson: Yes, this moderate number indicating a floor in confidence is actually good news, because if it were any higher it could have pre-empted further rate cuts by the Federal Reserve. If the consumer confidence had rebounded enormously, traders might have become concerned that Greenspan would say, "See, it isn't bad. We don't have to do anything else." That would be bad.

This moderate bounce is important because Greenspan looks at consumer confidence, and it's an important indication of future spending.

The bounce also seems to be consistent with the slightly rising level of the stock prices. The more positive mood of consumers might be one of the reasons more money is moving back into the market in the past couple of days. Consumers seem to be realizing the downturn is overdone, and the Federal Reserve move is giving the lift to the market that it needs.

TSC: How important is the Conference Board's consumer confidence index, and how does it compare with the University of Michigan consumer confidence index? Which is the more closely followed figure?

Davidson: Both tend to move in tandem, and both are equally important. The charts tend to look very similar. In both cases, the consumer confidence fell off significantly in the last two months of last year and the last two months of this year.

As a result of the Conference Board number being up slightly from consensus, it's possible that the University of Michigan March figure being released Friday might also be up slightly than originally forecast. The consensus was that it would be 91, slightly below its February 91.8 figure.

TSC: What other key confidence indicators do you follow?

Davidson: The net employment figure is an important one. I also look at the jobless claims every Thursday. There were 375,000 new claims last Thursday, which shows that there is some softness in the labor markets. Ultimately, I think that will lead to a little bit higher unemployment.

But more than these indications, I am interested in the lower interest rates and subsequently lower mortgage rates and refinancing. This will give consumers cash.

Beyond this, though, the real confidence will come out of the Congress and the president getting together on a tax-cut plan. This will have a tremendous consumer confidence, and as a result, I look for a consumer-led recovery in the second half of the year.