Wednesday, June 27th, 2007
Sinking Consumer Confidence: A Harbinger of Rougher Waters Ahead?
Consumer confidence skidded in June to its lowest level in nearly a year, a development that bodes poorly for companies that sell luxury goods or other big-ticket items to American consumers, and possibly for investors, as well.
The New York-based Conference Board said yesterday that its Consumer Confidence Index dropped nearly 5 points to reach 103.9 in June, down from a revised 108.5 in May—its lowest level since August 2006, when the index was at 100.2. (For the full text of the Conference Board comments go to http://www.conference-board.org/economics/consumerConfidence.cfm).
Although consumer confidence is a so-called “lagging indicator”—it measures a past point in time—it’s still very closely watched by economists and professional investors as something of a harbinger of what’s to come.
Consumer spending accounts for about two-thirds of all economic activity in the $10 trillion U.S. economy. So any sign of a major drop off in consumer spending is taken very seriously by financial forecasters and investors alike. Needless to say, it’s also very closely watched by both product manufactures and product retailers.
Index changes of 5% or more—either up or down—are usually seen as strong indicators of a major change in the economy’s health. The 4.6-point decline for June represented a very-strong 4.24% change in the index.
Second, although forecasters had predicted a decline in the index, they had only anticipated a slight step back: The consensus CCI estimate for June was 106—meaning the reading of 103.9 was much weaker than anticipated.
Rising oil prices and continued bad news about the formerly white hot U.S. housing sector have weighed heavily on the consumer’s psyche. In fact, in a separate report, the U.S. Commerce Department said yesterday that sales of new homes fell for the fourth time in five months, deepening already-severe worries about the once-hot housing market.
All of these factors will be carefully weighed by the U.S. Federal Reserve’s policymaking Federal Open Market Committee, which begins a two-day meeting starting today. Although investors are predicting the central bankers will leave the benchmark Federal Funds Rate at its current 5.25%, Fed watchers will scrutinize any statements the central bank makes for clues about the potential for interest-rate shifts in the future.
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