Consumer Confidence Rebounded

The May Index of Consumer Confidence from the Conference Board rebounded much more than expected to 102.2. Confidence had fallen in each of the prior three months and Consensus expectations had been for another decline to 96.1.

During the last twenty years there has been a 52% correlation between the level of consumer confidence and the y/y change in real consumer spending. The correlation rose to 66% during the last ten years.

Consumer expectations recovered nearly all of the prior month's sharp drop as expectations for jobs and business conditions rose.

The present situation index also recovered nearly all of the prior month's decline though jobs were viewed both as more plentiful and hard to get by a greater number of survey participants.

The Conference Board’s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.

The Chicago Purchasing Managers Business Barometer fell sharply in May. The 11.5 point decline to 54.1 was the steepest drop since 1974, nearly matched the record for a one month decline and pulled the index to its lowest since June 2003. Consensus expectations had been for a more moderate drop to 62.0.

During the last ten years there has been a 65% correlation between the level of Chicago PMI and the three month change in factory sector industrial production.

New orders and production posted the sharpest declines of the component series and the employment index fell to the lowest level since January. During the last ten years there has been a 75% correlation between the level of the employment index and the three month change in factory sector employment.

The index of prices paid fell again to the lowest level since September 2003. During the last ten years there has been an 86% correlation between the Chicago price index and the three month change in the "core" intermediate goods PPI.

Both business and consumer confidence in the Euro Zone declined in May as shown in the first chart. Consumers have been more pessimistic than businesses since October 2002. The percent balance between those consumers who were optimistic and those who were pessimistic reached a low point of -21 in March 2003. After improving through the rest of 2003, the percent balance has ranged between -13 and -15. The percent balance was at the low end of this range in May. The high unemployment rate in the Euro zone may account for much of the pessimism of consumers. The rate has ranged narrowly between 8.8% and 8.9% for the past year and a half.

Business confidence as represented by the percent balance of respondents in the industrial sector who believe conditions will improve over those who believe conditions will worsen declined to -11 from -9 in April. Although business confidence has been stronger--in that it has been less negative--than that of consumers since October, 2002, it has since declined sharply--from -3 in November of last year to -11 in May, a level last seen in August 2003. Among the more commonly cited causes of the decline in business confidence are the high and rising oil prices and the rise in the value of the Euro that are shown in the second chart.

Business confidence has been affected adversely by rising oil prices and the rising value of the euro. The recent history of both of these factors are shown in the second chart.