Consumer confidence surges

Last Friday the University of Michigan consumer confidence survey registered its highest reading in eight years. This survey comes out twice monthly, and this report was the preliminary reading for the month of December.

I can think of four key factors that can impact consumer confidence. These would be: job prospects, changes in overall wealth, the cost of living, and some measure of health and safety.

Starting with job prospects, we can see improvement in this area. The unemployment rate has been consistently dropping, and the number of new layoffs is at a relatively low number. The pace of new job growth has been increasing. Nonetheless, wage gains are still relatively small, and there is still a large number of discouraged workers out of the labor force.

Overall wealth for most people would be the value of one’s home and their investments. The stock market is near record levels, despite the decline that was experienced last week. Real estate prices have been increasing on a national basis, and in our area on the Westside, have surpassed their previous highs. Nationally real estate prices have yet to surpass the 2006 levels.

When prices are rising rapidly that tends to create unease among consumers. In recent years inflation has been relatively tame, though some items have risen significantly, such as health insurance. Recently a very high profile item that most of us purchase, which is gas, has declined significantly. This certainly has been a key contributor to the rebound in consumer confidence.

Health and safety issues generally do not have a major impact on consumer confidence. However, when they occur, their impact can be quite significant. We had the Ebola scare recently and fears of terrorism periodically occur. Certain international events can create unease, especially if they involve Americans overseas, or our troops.

If I were to summarize the four factors, three of them are showing improvement, with the health and safety one more mixed. While there are plenty of trouble spots throughout the world, I don’t think that international developments are significantly worse versus what we have experienced in recent years.

For many consumers the factors mentioned would have different degrees of relevance. For young people most would probably not be overly concerned about their wealth, since they probably don’t own a home and have limited investments. However, their job prospects would be very significant. However, a person near retirement would be less concerned about their job, but be more concerned about the value of their house and investments.

While the University of Michigan confidence level is at its best reading in 8 years, it is still far from an all time high. Actually on a historical basis, the current reading is only slightly higher than average. In essence this is saying that consumers are only getting back to feeling normal, after being fairly depressed for a number of years.

There is a decent correlation between consumer confidence and spending. Recently auto sales have been quite strong, which is a sign that consumers are feeling better. This rebound in consumer sentiment should also translate into a strong Christmas selling season for retailers.

There is always the possibility that some unanticipated event can occur that will derail consumer confidence. However, for now the economic news, at least in this country, has tended to be more favorable. This would imply that consumer confidence readings should stay relatively high.

The huge drop in gasoline prices over the last few months has probably been the largest factor in the confidence rebound. As I discussed last week, prices will probably not stay permanently at these levels, as some supply will be curtailed with the lower prices. However, it is unlikely that gasoline prices will get back to $4 per gallon anytime soon.

Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.