Confidence is a fickle feeling.
Inherently, the financial markets tend to focus less on the inner subtleties of human emotion in favor of hard data and analytics. In my many years embedded in Chicago’s chaotic trading pits, I don’t recall any request to cease the usual yelling and screaming in place of a group hug. But when it comes to the feelings of the American consumer, the markets do hold a vested interest – albeit in a more analytical sense.
The Consumer Confidence Index is a key measure of consumer optimism on the state of the U.S. economy. It is released each month by The Conference Board, a U.S.-based global provider of economic data and analytics. The index has a benchmark of 100. Any reading above 100 indicates an optimism on jobs and income by consumers, who ultimately will spend money and stimulate economic growth.
When it comes to economic growth, the American consumer reigns supreme. Consumer spending drives two-thirds of all U.S. economic activity. Consumer spending is defined as the household purchases of durable and non-durable goods and services such as cars, furniture, food, clothing and education, among others.
In August, the Consumer Confidence Index was reported at 135.1. This was slightly below July’s level of 135.8, but still remains near a 19-year high. For perspective, in the 52-year history of the index, the all-time-high is 144.7, set in July 2000. The record low is a dismal 25, set in February 2009 during the height of America’s sub-prime mortgage crisis.
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Apart from the occasional dips and blips, consumer confidence has steadily remained quite strong. August was the thirty-sixth consecutive month with an index level above 100, dating back to July 2016. But for the financial markets, it’s not enough that consumers simply be confident. That optimism must be conveyed in a conviction to spend.
Despite an increasingly weak global economy and continued escalations in the U.S.-China trade dispute, Americans have alleviated Wall Street concerns that consumer spending would recede and wait for calmer waters. July was the fifth consecutive month of increasing retail sales growth. In the April-June second quarter, the consumer spending component of U.S. economic growth skyrocketed at an annual rate of 4.7%, the biggest quarterly pace of growth in nearly five years.
The logical question is why? Why would the American consumer — faced with a volatile stock market and all the concerns weighing on the U.S. economy — remain optimistic and continue to spend?
The answer lies in the strength of the U.S. labor market. With an unemployment rate of just 3.7%, the U.S. labor market is the strongest in 50 years. Annual wage growth of 3.1% remains near a 10-year high. Simply put, job security and rising wages go a long way in creating optimism. And for the markets, so far, that optimism is translating to increased spending at America’s check-out lines.