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Confidence is weak, but so what?

Consumer confidence, according to the Conference Board's survey, unexpectedly fell this month (it was expected to hold steady, according to Bloomberg's survey), and this news today helped push the stock market down and the bond market higher. I have never paid much attention to confidence indicators, since they are reliably lagging indicators of what is going on in the economy. As this chart shows, confidence typically declines well after the end of recessions, and usually hits  new highs just before recessions begin. If anything, this chart is a great contrary indicator, and today's news should be taken as bullish. Consumers are usually the last ones to realize the economy is doing better.

For comparison purposes, the next chart shows confidence data as put together by the University of Michigan. Although their survey also declined in February, it was a very modest decline, and the trajectory of the index since the end of this recession has been noticeably stronger than the Conference Board's.

In any event, it's difficult to imagine consumer confidence improving significantly between now and the November elections, mainly because unemployment is likely to continue to be unusually high. There will be lots of talk this year about how this is another one of those "jobless recoveries." This in turn will predictably lead to more calls for another "stimulus" bill or "jobs package." That of course is exactly what we don't need. In my view, one of the main reasons this recovery has been unimpressive to date is the massive amount of stimulus spending that was approved last year. Most of the "spending" authorized by those bills was in the form of transfer payments, and those do little or nothing to create jobs or growth. What we are left with is more government interference in the economy, and a much higher debt burden. This in turn creates expectations of much higher tax burdens, and that stifles the incentives to take risk and create real jobs.

But even though confidence is low, it can improve slowly, as can the economy. We don't need new jobs to have a stronger economy, since the existing workforce can work harder and more efficiently, as indeed it has over the past year—nonfarm worker productivity rose an impressive 5% in the nine months ended last December. Over time, productivity tends to be about 2% per year; add this to a meager 1% growth in jobs (which is not enough to bring the unemployment rate down, since the workforce tends to grow about 1% a year) and you get economic growth of 3%. I've been saying we are likely to see growth of 3-4% this year; that's above the market consensus, but it is still consistent with only a very modest decline in the unemployment rate, and continued low readings of consumer confidence.

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