Consumer Confidence Improves Modestly in August

In the latest bit of mildly positive economic news, consumer confidence increased in August, according to the Conference Board. Its index rose to 53.5 from a slightly upwardly revised 51.0 in July. That was better than the 50.0 that economist expected and reverses the downward trend beginning to form over the prior two months. Confidence still has far to go, however.

First, here's the chart for the trailing twelve months:

confidence 2010-08.png

You can see that, had confidence continued to decline in August, then it would have begun flirting with its 12-month low. Its rise in August was pretty small, and not large enough to surpass the index's value of 54.5 recorded a year earlier. This shows that in the past twelve months, consumer sentiment has been virtually unchanged. That's a pretty sour verdict for the so-called recovery.

The Conference Board's other sentiment-related indicators shed a little light onto the change in confidence. Americans actually felt their present situation was worse in August, with that index declining to 24.9 from 26.4 last month. Yet they're more optimistic about the future, with the Expectations Index increasing moderately to 72.5 from 67.5 in July. So even though Americans felt their economic situation was worse in August, they expect it to get better.

It's hard to overstate how important consumer sentiment is right now. It's arguably the factor most central to the recovery. Once Americans begin broadly feeling better about the economy, their demand for products and services will increase. That will cause firms to begin hiring again, pushing down the jobless rate.

Unfortunately, the problem is more than merely psychological. Many Americans are deleveraging and saving in response to the economic problems experienced in the deep recession. And the labor market has created a sort of chicken-egg problem, where sentiment remains low because unemployment remain high, but firms aren't hiring because that low sentiment is stifling demand.

So it's likely that a lethargic rise in sentiment is all we can really hope for under these circumstances. If this month's move is a renewed slow march upward in sentiment, then at least that's a start. But to solidify that trend, other economic indicators will also have to begin to make more progress -- especially unemployment, for which we'll get August data on Friday.