What Does Rising Confidence Mean?

December 28, 2001
Duke Heberlein

U.S. consumer confidence
surged this month, the first increase since June,
according to a survey that indicates Americans feel the worst of the recession
is over.

The Conference Board’s index of
consumer attitudes toward the economy increased to 93.7 in December from a
revised 84.9 in November. That’s the first rise in six months and the largest
gain since February 1998. Optimism about the future rose.

What does rising consumer confidence
mean? It is an indirect signal that layoffs are tapering off, and the job market
is stronger than it was previously.

State unemployment offices
received 392,000 initial claims for jobless benefits last week, compared with a
nine-year high of 535,000 at the close of September, the Labor Department
reported. While joblessness remains a threat, Americans felt sure enough about
their prospects to shop at discounters such as Wal-Mart stores
(
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and Target stores
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Orders for durable goods fell 4.8%
in November after rising 12.5% a month earlier, the Commerce Department
reported. Orders excluding the volatile category of transportation equipment
rose 1.1% after rising 2.9% in October, the first back-to-back gains in almost
two years.

The consumer confidence number is
the second to show an increase for this month. The University of Michigan’s
index of consumer sentiment rose to a four-month high. It was the third
consecutive gain for the index, which is based on a telephone survey of 500
people and focuses more on spending plans. The Conference Board survey is
oriented more toward job security.

The Michigan survey had shown an
improvement in attitudes toward buying homes, appliances, furniture, electronic
goods, and other durables. People were less apt to buy cars after zero- interest
financing pushed sales to a record pace in October.

With the better-than-expected Consumer
Confidence numbers, U.S. stocks are up for a third day.

The Dow has risen 1.4% this week. The average,
which had sunk as much as 24% for the year in trading following the Sept. 11
terrorist attacks, has cut its year-to-date loss to 5.7%.

The S&P 500 has risen 1.6% this week and is
down 12% so far this year. The Nasdaq has rallied 2.7% in the past five days and
is down 19% in 2001.

Earnings for companies in the S&P 500 have
dropped every quarter this year and are expected to fall in the first
three-month period of 2002.

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What Does Rising Confidence Mean?

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