Consumer Confidence Crumbles

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Includes: COST, FDO, JCP, M
by: Zacks Investment Research

The Conference Boards Index of Consumer Confidence dropped to 47.7 from 53.4 in September. While this is much higher than the readings in the low 20’s earlier this year, it is a very disappointing reading. Both the current situations index, and the expectations for conditions over the next six months dropped.

The present situation index fell to 20.7 from 23.0 and now stands at its lowest point since February of 1983, when it hit 17.5. The expectations component had seen a much larger recovery earlier this year, but it dropped from 73.7 last month to 65.7 in October. The number of people who see business as bad increased to 47.1% from 46.3% in September, while the percentage who saw business as good fell to 7.7% from 8.6% in September (where are those 7.7% of people located I wonder -- North Dakota?).

The main factor weighing on consumer sentiment is the awful labor market. Almost half (49.6%) see jobs as hard to get, up from 47.0% last month. While the pace of job losses has declined over recent months, it did tick up fairly significantly in the September report, breaking the downward string.

Next Friday we will get the October jobs report, and we will see if that was just a blip or the start of a new downward trend. Believe it or not, there are still a few people out there who think that jobs are plentiful -- a whopping 3.3% of them, down from 3.6% last month.

As for expectations about the future, there are still more people out there who expect things to get better over then next six months rather than deteriorate, but the margin is closing. In October, 20.8% expected to see things get better versus 18.3% who thought things will get worst by next spring, a 2.5% margin. Last month 21.3% expected improvement while 14.6% expected things to get worse, a margin of 6.7%. Only 10.3% expect their personal incomes will be going up over the next six months, down from 11.2% last month.

If people are not confident about the future, they are less likely to open up their wallets. As we move into the Christmas shopping season, this drop in confidence could be setting the stage for a very weak retail season, although last year was not exactly great and so retailers will have the benefit of easy comps.

I suspect that the discount-oriented stores like Family Dollar (FDO) and Costco (NASDAQ:COST) will be better positioned to weather the storm than mid-priced retailers like Macy’s (NYSE:M) and JC Penney’s (NYSE:JCP). Over the long term, less consumer spending is a good thing, since it is the only way that we will get the savings rate back up. However, in the short term it directly causes economic weakness, and with it even fewer jobs and less confidence.

Thus the best we can hope for is that the savings rate rises, but does so in a gradual way. We will get a more direct reading on consumer spending and income when that data is released on Friday morning.