Consumer Confidence: Is the Tide Coming In?

Posted by: Peter Coy on May 22

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If you’re heading for salt water this Memorial Day weekend, you’ll no doubt notice the majestic turning of the tides. Because the strength of the waves is random, it’s hard to pick the precise moment when the tide stops going out and starts coming back in. This can lead to some lively debates on the beach, sometimes involving where to build sand castles.

Picking the turning points in confidence about the economy is even more difficult than calling the tide’s turn. But a recent report from Wachovia Economics Group takes a crack at the problem.

Confidence in the economy is hugely important because it has a self-fulfilling quality: If people are confident that things are getting better, then they will spend, invest, and take other actions that will end up making their optimistic prophecies come true. Same goes in reverse, of course, which helps explain the depths of the current recession.

The Wachovia team, led by Chief Economist John Silvia, says, “We expect that confidence may have seen its trough across sectors, but just as the economy will be slow to repair the damage sustained and regain strength so to [sic: should be too] will confidence need time to rebuild.”

On Tuesday, the Conference Board is releasing its widely watched consumer confidence index for May. The consensus forecast in Bloomberg’s survey of economists is for the index to bump up to 42.3 from 39.2 in April and a shockingly low 25.3 in February. (Incidentally, the recent peak for confidence was 111.9 in July 2007—how blissfully unaware we were!)

Neither Wachovia nor Bloomberg pays much attention to my own favorite confidence measure, which is from Gallup and is conducted daily (as opposed to monthly for the best-known measures). The Gallup Daily measure of the consumer mood shows a big decline since February in the percentage of Americans who rate current economic conditions as only fair or poor and who think things are getting worse or staying the same. Still not very many people are positive, but the percentage who see things as mixed has grown a lot. That’s a step in the right direction.

Update: The Conference Board’s sentiment index came in today (May 26) much higher than expected: 54.9. The increase was the biggest since April 2003, when we were still recovering from the last recession.

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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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