Stocks weakened Tuesday morning after The Conference Board research group released its consumer confidence index for September, which showed a nearly 20-point decline that was the biggest one-month drop since 1990.
The market’s reaction makes sense. If Americans are growing more worried about their jobs and the state of the economy, then it is only logical they will become less likely to purchase goods, have dinner in a restaurant, go on vacation or do any of the other things that help keep the U.S. economy humming.
The problem is, not everybody is convinced that a monthly reading of consumer confidence has much value as an economic indicator. What consumers say, such critics contend, doesn’t always reflect what consumers do.
“Statistical research shows that consumer confidence is not a reliable predictor of future economic activity,” Claymore Advisors investment strategist Brian Wesbury noted in a recent investor note.
“For example, consumer confidence fell following 9/11, but retail sales rebounded immediately as the economy moved from recession to recovery in the aftermath of the attacks.”
And while confidence dropped more than 10 points after four hurricanes blasted Florida a year ago, “consumers bounced back within a few months,” Wachovia economist Gina Martin noted Tuesday.
Still, the higher energy costs that accompanied Hurricane Katrina’s devastation make the latest confidence readings different, Martin said: “Only time will tell whether confidence will bounce back in the months ahead.”
Nomura chief economist David Resler also suggested the latest drop in confidence may signal trouble ahead.
While it’s true “the heart-wrenching images from ground zero of Hurricane Katrina undoubtedly accounted for much of this drop in confidence,” Resler said, “past experience suggests that large and sudden declines do not reverse quickly and often have a lingering negative effect on spending.”
Ken Mayland of ClearView Economics offered a brusque take.
“Duh!” Mayland told investors. “Let’s see. There was a tragic and substantial loss of life. Gasoline prices are almost $3/gallon. … Hundreds of thousands of people have lost their jobs. Is it any wonder that confidence is down sharply?”
Investors should “accept this for what it is: an emotional reaction to tragic circumstances,” he said. “But are people going to stop spending? No!”
Equity markets spun their wheels Tuesday, sliding in the morning on the consumer-confidence numbers, then firming a bit after a widely anticipated speech by Fed Chairman Alan Greenspan proved to contain little that he hadn’t said previously.
The Dow Jones industrials closed up 12.58, at 10456.21.
The Standard & Poor’s 500 index was essentially flat, rising less than one-tenth of a point to 1215.66.
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Shares of many semiconductor-makers dropped after a prominent stock analyst lowered his view of the sector’s prospects Tuesday. As a result, the technology-heavy Nasdaq composite index dropped 5.04 points, to 2116.42.
Treasury bonds were almost unchanged. And in a welcome development for stocks, the price of oil for November delivery declined 75 cents, to close at $65.07 on the New York Mercantile Exchange.
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Taser shares, which traded above $33 just 10 months ago, have been battered by questions about the safety of the company’s product and other issues.