This week, The Conference Board published the Consumer Confidence Index, and the data showed that consumer confidence decreased in December to 128.1, down from 136.4 in November. Consumer confidence is important, as consumer spending still accounts for approximately 70% of U.S. economic activity (as measured by Gross Domestic Product, or GDP). For this reason, investors focus on this economic metric to better gauge the health of the U.S. consumer, and ultimately the economy.
* A link to the methodology for the calculation of this index is presented at the end of this blog post
Reviewing the data further shows that the decline in the Consumer Confidence Index appears to be driven primarily by a decrease in the Expectations Index, a subcomponent of consumer confidence, which is based upon consumers’ short-term outlook for income, business, and labor market conditions. This subcomponent decreased to 99.1 in December, from 112.3 the prior month, as survey respondents lowered expectations that more jobs will be available over the next six months. The Present Situation Index, the other subcomponent of consumer confidence which measures consumers’ assessment of business and labor market conditions, was almost unchanged at 171.6 (from 172.7 in November). The data suggests that consumers may be responding to recent volatility in the equities markets, rising short-term interest rates, international trade wars, and the recent government shutdown.
The graph below from Bloomberg shows the Consumer Confidence Index data for the last 15 years (beginning 12/31/2003). While the 8.3 point decrease in the index was the largest decrease since July 2015, a longer-term review of consumer confidence suggests that it remains very high by historical standards. Furthermore, consumer confidence was at its peak for this period of time as recently as October 2018. Looking at the graph, it is difficult to determine if the recent decrease represents a pause in consumer confidence or a change in direction.
It should be noted that the current data for the economy has been favorable if not strong as 2018 comes to a close. Data and reports coming in from consumer spending during the holiday season has been strong, GDP is on pace to average almost 3% in 2018, and unemployment is currently at a historical low of 3.7%.
It will be interesting to watch going forward if the decrease in consumer confidence reflects a meaningful change in the direction or strength of the economy, or simply consumers responding with uncertainty to the headlines dominating the news right now.
* The Conference Board website further details the technical methodology for The Conference Board Consumer Confidence Index.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Nick is a Vice President and Portfolio Manager for Washington Trust Bank’s Wealth Management & Advisory Services. He offers our clients the expertise to analyze portfolios and unique assets to ensure that they are suitable for meeting our clients’ goals and needs. Nick partners with our Relationship Managers to provide continual analysis to ensure that these customized portfolio solutions maintain the balance between risk and growth in order to ensure continued success in meeting the clients’ goals.