Consumer Confidence Climbs

Trio of studies indicate improved expectations in August

American consumers can see a light ahead in the tunnel and they are beginning to show signs they think it might not be an oncoming train. Three new studies, released independently last week by The Conference Board, Reuters/University of Michigan, and State Street Global Markets, all indicate a resurgent confidence about the economy.

First off, the Conference Board Consumer Confidence Index rebounded in August to 54.1 (1985=100), up from 47.4 in July. The Board's Present Situation Index increased slightly to 24.9 from 23.3 last month. The Expectations Index improved to 73.5 from 63.4 in July.

"Consumer confidence, which had posted back-to-back monthly declines, appears to be back on the mend," said Lynn Franco, Director of The Conference Board Consumer Research Center in a statement announcing the index movement. "The Present Situation Index increased slightly, mainly the result of an improvement in consumers' assessment of the job market. The Expectations Index improved considerably and is now at its highest level since December 2007 (Index, 75.8). Consumers were more upbeat in their short-term outlook for both the economy and the job market in August, but only slightly more upbeat in their income expectations. And, as long as earnings continue to weigh heavily on consumers' minds, spending is likely to remain constrained."

The Conference Board research found that the percentage of consumers expecting an improvement in business conditions over the next six months increased to 22.4% from 18.4%. Those anticipating worsening conditions decreased to 15.8% from 19%. The percentage of consumers expecting more jobs in the months ahead also increased (from 15.5% to 18.4%) and the proportion of consumers expecting an increase in their incomes increased slightly to 10.6%.

The study from Reuters/University of Michigan Surveys of Consumers indicated that while consumers expect the economy to improve in the coming months, they are also reporting the most dismal of their personal finances since the surveys began in 1946. "Unfortunately, this first ray of optimism was accompanied by the grimmest assessment by consumers of their personal finances since the Great Depression," noted Richard Curtin, the survey's director, who indicated that consumer spending is likely to remain in low gear for quite some time. Just 16% of consumers in the survey reported their finances had improved, which was the smallest proportion in the survey's 63-year history, and just 25% indicated that they expected any improvement in the year ahead.

The survey's Index of Consumer Sentiment was 65.7 in the August 2009, down slightly from July's 66.0 and the 67.5 figure last August. The Index of Consumer Expectations was 65.0 in August, up from 63.2 in July and considerably above last August's number of 57.9

According to Curtin, the key change August was in the job situation. "News of job losses declined significantly, with the August survey tallying less than half the reports of job losses recorded just six months ago," he said.

The third leg of the confidence stool is the Global Investor Confidence Index from State Street Global Markets, which rose by 3.5 points to 122.9 for August 2009. On a regional basis, it was European institutional investors who displayed the greatest appetite for increased risk as their benchmark rose to 109.2 from 104.9 in July. Institutional investors in North America (-2.2 points) and Asia (-2.3 points).

The State Street Investor Confidence Index measures investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors. The index is based on financial theory that assigns precise meaning to changes in investor risk appetite, or the willingness of investors to allocate their portfolios to equities. The more of their portfolio that institutional investors are willing to devote to equities, the greater their risk appetite or confidence.

"This month we note some increased regional variation across the Indices," added O'Connell. "While European institutional investors continued to 'catch up' with their North American counterparts, in terms of reallocating out of cash, North American and Asian institutions displayed some ambivalence about further reallocations, given trends over the last six month," observed State Street Associates Director Paul O'Connell. "Keeping in mind that a level of 100 denotes 'neutral' for the Index - the level at which investors are neither reducing nor increasing their allocations to risky assets - we can see European confidence remains somewhat below that of North American institutions, and that caution prevails in Asia."

State Street Global Investor Confidence Index

August Results

Global 122.9

North America 118.4

Europe 109.2

Asia-Pacific 91.8

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