The Daily Interview: The Case for an Economic Turnaround
While Wall Street debates the severity of the economic downturn and the stock market continues to get hit with corporate earnings shortfalls, consumers continue to have faith in the economy's eventual recovery. That, at least, is what the latest consumer confidence index numbers are saying, according to Conference Board economist Ken Goldstein, who argues that the strength of the labor and housing markets is what has prompted consumers to continue spending and what has kept the economy in positive gross domestic product -growth territory.
The Conference Board
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TSC: The consumer confidence index rose 1.6% in June to 117.9, up from 116.1 in May. Isn't it surprising that consumers' confidence continues to remain strong given that the economy and the stock market remain weak?
Goldstein: Absolutely not. It's not the stock market. You look at the stock market and consumer confidence over the last six months, and you'll see that there's no relationship. Consumers are not driven by what happens in the stock market but by what happens to the labor market and the housing market, not the stock market.TSC: But the labor market hasn't been that good. The unemployment rate rose to 4.5% in June, up from 4.4% in May. Goldstein: That's right. But it hasn't been that bad. For all the news and stories about the economy, the unemployment rate is still 4.5%. While it's not terrific, and help-wanted classifieds show that it's not changing very much, the unemployment rate is still relatively low. On top of this, people are still getting wage increases. That's what's holding up consumer confidence. It's not interest rates and it's absolutely not the stock market. TSC: Can you put the consumer confidence number in context? When The Conference Board began the index in 1985 based on a representative sample of 5,000 U.S. households, it was at 100. Can you explain how this figure of 117.9 compares to 1985 and other periods of time? Goldstein: Almost any time that the index is above 100, times are good. This compares to where it was in the mid-1980s, when the economy was humming along pretty well. So what it tells us is that American consumers are saying that the economy isn't that bad right now and they're not convinced it's going to fall apart over the next six months. Just the opposite. Consumers are telling us that they think that it's going to be better six months from now. Not terrifically better, per se, but better and that things are not so bad now. TSC: Has the consumer confidence figure fallen below 100 many times since 1985? Also, how high has it gotten? Goldstein: Yes. If you go back to 1990 and 1991 in the midst of the Gulf War and the recession, the index was down in the 60s and 70s. It has gone as low as the mid-40s. If you go back to the back-to-back recessions in the early 1980s and all of the downsizing in the early 1990s, this index has fallen well below 100. Until the last three years, the peak has been around 120 or so. Then in 1999 and 2000, it shot through the roof like it wasn't even there. It went up into the mid-140s. Now, here's the recent context. It went from the mid-140s down to 110, 120 at the same time that the economy went from 5% to 6% GDP growth rates to less than 2% over the last two quarters. That's still growth, not a recession. But that loss of momentum is where you're feeling the impact. Imagine being in a car and you're just tearing down the highway at 100 miles an hour. And then you see that telltale, little red rotating light and you decide to slam on the brakes and you slow down to 70. You feel like you're crawling, but you're still going 70 miles an hour, except you've decelerated so much over such a short period of time. That's what happened to consumer confidence. That's what happened to GDP growth. And that's what gave people the feeling that they're in a recession. Technically we aren't, but it feels like it because of that loss of momentum.
|Down But Not Out |
The consumer confidence index is down sharply since last year, but still well above historical levels.
|(Seasonally adjusted index numbers, 1985=100) |
Sources: The Conference Board; NFO Research, Inc.
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