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Consumer confidence is anything but a reliable leading indicator of the economy's health, but this time it may be. That it is still relatively low from an historical perspective simply reflects the fact that we've through a pretty rough recession. Confidence was deeply shaken, and it takes time to rebuild.

Recessions typically happen when everyone is very confident, because then the unforeseen can be terribly disruptive. But now most folks are still looking cautiously around every corner and under every rock, worried that the unforeseen may strike again. This is quite normal and consistent with the early stages of just about every recovery.

That confidence has been slowly rising for the past year is more encouraging this time around, since the latest recession was all about a huge shock to confidence (i.e., widespread fears of a global financial meltdown), so as confidence returns, money that was socked away under mattresses gets gradually spent, and that helps economic activity recover. We are in the midst of a virtuous circle, where rising confidence boosts spending, rising spending boosts production, and rising production boosts confidence, etc.

Source: Rising Consumer Confidence: A Good Sign