Time to Rename the Consumer Confidence Index

The economy needs a double shot of relief to speed recovery -- more confidence and more credit. Consumers need reasons to feel less pessimistic, and lenders have to help by making it easier to get loans for homes and businesses.

Consumer confidence, or the lack thereof, has a big effect on the economy. Think about it. Confidence is a linchpin to success in any endeavor. You have to believe you have the ability to succeed.

If you are a baseball fan and you doubt me, just watch any recent Boston Red Sox game. You can see the dejection and lack of confidence in the Boston players' body language after going 7-19 in September. The once mighty Red Sox have to defeat the Baltimore Orioles tonight to get a shot at the playoffs. I put their chances at less than 50-50, based on the impact of the free-fall on their players' psyches.

I've seen that same abject look of confusion and despair on many of my colleagues' faces as they question not whether the economy is getting better, but how bad it will get. Many who have slugged it out during the past four years are tired, burned out, and wondering whether time has run out on them and their businesses.

The proof is in the numbers. The Conference Board released its Consumer Confidence Index this week, and it showed only a very slight improvement in September. The movement was so small that the index is basically unchanged.

Confidence eked up ever so slightly, after recessionary fears caused it to plunge to 45.2 in August from 59.2 in July. The index now stands at 45.4. Big improvement -- 0.2 points.

Based on recent results, the index should be renamed the Pessimism Index.

Other numbers released by the Conference Board also point to widespread uneasiness about the economy, at least in the short term. The (lack of) confidence index showed those claiming business conditions are "good" decreased to 11.7% from 14.1%. Those believing business conditions are "bad" remained virtually unchanged at 40.4%.

Most people still think business will get worse before it gets better. The survey found those expecting business conditions to improve over the next six months decreased to 11.3% from 11.8%, while those expecting business conditions to worsen declined to 22.6% from 24.6%.

In short, nine out of 10 consumers do not believe business conditions will improve. No wonder the economy is in the dumper.

Lynn Franco, director of the Conference Board Consumer Research Center, said in a press release:

The pessimism that shrouded consumers last month has spilled over into September. Consumer expectations, which had plummeted in August, posted a marginal gain. However, consumers expressed greater concern about their expected earnings, a sign that does not bode well for spending. In addition, consumers' assessment of current conditions declined for the fifth consecutive month, a sign that the economic environment remains weak.

Chris G. Christopher, Jr., senior principal economist for IHS Global Insight, points out that the Conference Board's numbers do not reflect the impact of the recent turmoil in the equity markets. He warned that even that tiny improvement is misleading, because consumer confidence is still at recessionary levels.

One industry that has struggled the past four years and continues to underperform is housing. It will be interesting to see how recent events, including the extensive flooding in the Northeast, affect what has been an improving residential market.

The National Association of Realtors reported last week that home sales rose 7.7% to a seasonally adjusted annual rate of 5.03 million in August from an upwardly revised 4.67 million in July. That's 18.6% higher than the 4.24 million-unit level in August 2010. Though sales increased, prices remained depressed. The NAR reported the median August existing single-family home price dropped 5.4% from a year earlier to $168,400.

Of course, it's easy to get lost in statistics. The S&P/Case Shiller Home Price Index, also released this week, showed a fourth consecutive month of increases for the 10- and 20-City Composites. Both rose 0.9% in July from June. Seventeen of the 20 metro areas posted positive monthly increases. Only Las Vegas and Phoenix were down month over month, and Denver was unchanged.

The problem with statistics is that they lag reality. Compared to the market volatility of the past month, July looks calm in retrospect. Maybe consumers felt better then than they do today, because I'm not noticing any rush to real estate offices. In addition, Hurricane Irene caused some disruptions at the end of August in the Northeast.

Irene and Tropical Storm Lee will probably affect home sales for the next few months in the Northeast. And I don't think the effect will be positive.

Between the real storms, the political storms in Washington, and the failing euro, businesses, workers, and people looking for work remain uncertain about the future. Until those fears are resolved and hope for things like jobs, promotions, and stability returns, big-ticket sectors such as housing will keep struggling.