Consumer confidence index plummets to a 40-year low

U.S. consumer confidence is at its lowest level since the Nixon Administration of the late 1960 and early 1970s. For younger investors, that's well before voice mail and cable television became common amenities in U.S. households.

U.S. consumer confidence plummeted in February to 25 -- a 40-year low -- the Conference Board announced Tuesday, as consumers found cause for concern in almost every area of their financial lives. Economists surveyed by Bloomberg News had expected the index to drop to 35.5 in February. The January index was revised lower to 37.4 from the previously announced 37.7; the index was at 38.6 in December 2008.

Current conditions continue to deteriorate

The board said consumers' evaluation of present-day conditions weakened significantly February. Those claiming business conditions are "bad" increased to 51.1% from 47.9%, while those claiming business conditions are "good" rose just incrementally, to 6.85% from 6.5%. Consumers' assessment of the job market was considerably more pessimistic than last month. Those saying jobs are "hard to get" rose to 47.8% from 41.1%, while those claiming jobs are "plentiful" decreased to 4.4% from 7.1%.

Further, the board said consumers' short-term expectations also deteriorated considerably. Consumers expecting business conditions to worsen over the next six months increased sharply to 40.5% from 31.1%, while those anticipating business conditions to improve declined to 8.7% from 12.8%.

In addition, the outlook for the labor market was also significantly more pessimistic, the board said. Those expecting fewer jobs in the months ahead surged to 47.3% from 36.9%, while those anticipating more jobs declined to 7.1% from 10.2%.

Also, the proportion of consumers expecting their incomes to increase declined to 7.6% from 18.1%.

The Consumer Confidence Index is based on a representative sample of 5,000 households.

Investors need to pay attention to the Consumer Confidence Index because, historically, consumer spending has accounted for about 60-65% of U.S. GDP. Moreover, rises in consumer confidence are directly correlated with increases in consumer spending. Hence, if confidence rises, and a trend forms, most likely that means good things for U.S. corporate revenue and earnings.

Economic Analysis: The latest consumer confidence reading is a reflection of the reality many if not most U.S. citizens face. Unemployment is at or approaching double-digit levels in several key states, the economy is showing few signs of turning around, the home foreclosure rate remains high, home prices continue to decline at a record rate, and the stock market is making new lows almost daily. That's more than enough to send consumer confidence downward.

Add uncertainty regarding the U.S. Treasury's plan to fix the banking system (toxic asset removal), and one can see why consumers are in a decidedly defensive mode. For confidence to rise, consumers will have to see noticeable, sustained improvement in job market and corporate conditions in the quarters ahead.
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