Selasa, 26 Maret 2013

Confidence: half full or half empty?

The Conference Board today reported that its March index of Consumer Confidence was much lower than expected (59.7 vs. 67.5). How should we interpret this?

My preference is to first put things in the proper perspective. That requires a chart like the one above.

Here's what I see in the chart: 1) this series can jump up or down by 5-10 points almost every month; therefore one month's datapoint does not tell you much at all. 2) the current level of the index is very depressed from an historical perspective, being at approximately the level that prevailed during the depths of the recessions in the early 1980s and the early 1990s. 3) the index has been rising, albeit irregularly, for the past four years.

I therefore conclude that what this indicator is telling us is that conditions, as perceived by the public, are gradually becoming less bad. Less bad, because confidence is still very low, and because things were even worse on balance for the past several years. So the proper way to see this is that pessimism is receding, not that optimism is rising.

This helps us to understand that the rise in the stock market is being driven much more by declining pessimism than by rising optimism. Put another way, the future has not turned out to be as bad as had been expected.

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