Consumer Confidence Still On the Rise, Despite European Uncertainty

Consumer Confidence Rose in May The roller-coaster motions of the stock and bond markets these days can confuse investors: Just when Americans start to become more confident about the U.S. economy, debt problems in European nations threaten to reignite the credit crisis, which would affect economic recoveries globally.

But amid that confusion, the U.S. consumer is clearly seeing things looking up.

Consumer confidence rose for the third straight month in May, unexpectedly jumping 5.6 points to 63.3 from a revised 57.7 in April, the Conference Board announced Tuesday. It was the highest reading for consumer confidence in two years, taking the top-line index back to levels last seen in August 2007, or well before the December 2007 start of the recession. The index was at 52.3 in March.

A Broad-Based Rise In Confidence

Although still weak compared to historical levels, consumer confidence has registered a broad-based rise so far this spring: Consumers are feeling better about current conditions, future business conditions, and, in a departure from the reports during the recent recession, about future job prospects.

The percentage of those saying current conditions are "good" increased to 10% in May from 8.9% in April. Those saying conditions are "bad" fell to 39.3% from 40.0%. Concerning future business conditions, 23.5% said they expect conditions to improve, up from 19.7% a month ago; and 11.5% expect conditions to worsen, down from 12.4%.

But perhaps the most compelling positive note in May's confidence report concerns the job prospects component. The percentage of consumers expecting more jobs in the months ahead increased to 20.4% from 17.7%, while those anticipating fewer jobs declined to 17.7% from 19.9%.

In sum, the index's components confirm a broad-based improvement in consumers' attitudes, driven by increasing optimism regarding both business and labor market conditions. The Conference Board's Consumer Research Center Director Lynn Franco called it a confidence move that "appears to be gaining some traction."

A Major Unknown: The Fate of Europe

Now, what could cause that confidence to hit an ice patch that could reduce some of that traction? Another renewed phase of the financial crisis, which could be triggered if Europe's debt crisis worsens.

At this stage, it's impossible to predict the impact of Europe's debt crisis on either regional economies or the global economy. If the fiscal stabilization packages and credit market liquidity actions are effective, the net result of the eurozone's crisis may only be a slight reduction in the EU's GDP, and no significant impact on the U.S. economic recovery. But if the sovereign debt contagion spreads, and credit markets tighten, it could throw Europe into a double-dip recession. Given the large amount of trade between the U.S. and the EU, the latter scenario would likely substantially reduce U.S. GDP, and with it, U.S. consumer confidence.

So let's keep our focus on the qualifier "as of May" when looking at the upward consumer confidence trend. Yes, confidence is rising, but that could change in a hurry, if Europe's debt crisis worsens.
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