Consumer Confidence Plunges in March on Lower Expectations

Consumer confidence plunged in March, with the metric tabulated by The Conference Board dropping to 59.7 from 68.0 in February for the headline measure. The index is benchmarked to a level of 100 in 1985. Consumers were apparently rattled by continued discord in Washington, with the sequester taking effect on March 1. Undoubtedly, the end of the payroll tax holiday earlier this year, even though it was originally intended to be temporary, weighed on confidence as take-home wages dipped by as much as two percent, and consumers may finally have taken note. Rising home prices may work to improve confidence in future months, however. The Present Situation Index decreased to 57.9 from 61.4. The Expectations Index posted a large drop, falling to 60.9 from 72.4 last month. Of the various metrics, only the Expectations component has a notable degree of correlation with the future direction of consumer spending, and even then, correlation is imperfect at best. How consumers feel, as they report in surveys, often does not correspond to what they actually spend. Still, the direction is not positive – though it merely reverses some of February's gain. Lynn Franco, Director of Economic Indicators at The Conference Board, said, “Consumer Confidence fell sharply in March, following February's uptick. This month's retreat was driven primarily by a sharp decline in expectations, although consumers were also more pessimistic in their assessment of current conditions. The loss of confidence, particularly expectations, mirrors the losses experienced this past December and January. The recent sequester has created uncertainty regarding the economic outlook and as a result, consumers are less confident.” Details of the report show relatively little change on certain specific issues. For example, those saying business conditions are “good” decreased to 16.0 percent from 17.6 percent, while those stating business conditions are “bad” increased to 29.3 percent from 28.2 percent. Consumers' assessment of the labor market was mixed, though the changes from last month also were relatively small. Those claiming jobs are “plentiful” decreased to 9.4 percent from 10.1 percent, but those claiming jobs are “hard to get” edged down to 36.2 percent from 36.9 percent. Consumers are once again pessimistic about the short-term outlook. It is here where we see more noticeable changes from February to March. Those expecting business conditions to improve over the next six months decreased to 14.4 percent from 18.0 percent, while those anticipating business conditions to worsen increased to 18.3 percent from 16.6 percent. Consumers' outlook for the labor market was also less favorable. Those expecting more jobs in the months ahead declined to 12.3 percent from 16.1 percent, while those expecting fewer jobs increased to 26.6 percent from 22.1 percent. This may perhaps be puzzling, as payroll data has shown notable improvement in recent months, with employers adding 236,000 new jobs in February, up from 119,000 in January and 219,000 in December. And layoffs have fallen as employers have hired, with new claims for unemployment having trended downward over the past year. Additionally, the proportion of consumers expecting their incomes to increase fell to 13.7 percent from 15.8 percent, but on the other hand, those expecting a decrease edged down to 18.0 percent from 19.3 percent. For both the number of jobs created and consumers' income levels, we might consider the fact that consumers may be better attuned to developments at their particular employer than outside economists or analysts might be. As such, this metric bears watching. The final caveat, however, is that this survey does not have strong predictive power, either over the direction of the economy or consumer spending in particular. It is best used in conjunction with other economic data, with this report as one component of many in developing a more comprehensive outlook.