Tuesday, February 28, 2012

Lower debt burden drives improvements in consumer confidence

The recent strength in US consumer confidence has taken some analysts by surprise. The Conference Board confidence indicator came in today at 70.8 versus the average expectation of 63.
FoxBusiness: "Consumers are considerably less pessimistic about current business and labor market conditions than they were in January," said Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement "And, despite further increases in gas prices, they are more optimistic about the short-term outlook for the economy, job prospects and their financial situation."
The chart below shows the confidence index almost at the post-2008 high (the high was reached about a year ago, just prior to the Libyan revolution).

Conference Board Consumer Confidence

So far analysts and the media have used the improving employment picture to explain this consumer optimism.
AP: There are reasons for optimism. The government says 243,000 jobs were added in January, pushing down the unemployment rate to 8.3 percent, the lowest in three years. Unemployment has fallen five months in a row for the first time since 1994. 
But there is a more fundamental explanation. The US consumer debt burden as measured in terms of interest coverage has been declining to levels not seen since the 70s. Historically low mortgage rates and reduced reliance on credit cards and home equity financing have brought down consumer interest payments as percentage of disposable personal income.

Source: ISI Group

This should in principle boost consumer spending going forward, assuming gasoline price increases do not derail the trend.

Update (3/1): The Bloomberg Consumer Comfort Index is now at levels last seen before the 2008 crisis (though still at depressed levels), confirming the general trend.

Bloomberg Consumer Comfort Index