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Consumer Confidence, Unemployment Rate and Gasoline Prices

By Anonymous

First from Reuters yesterday: Consumer mood unexpectedly worse in early April

U.S. consumer sentiment took a surprise negative turn in early April due to a persistently grim outlook on income and jobs, a private survey released on Friday showed.
...
The surveys' overall index on consumer sentiments slipped to 69.5 in early April -- the lowest in five months. This was below the 73.6 reading seen at the end of March and the 75.0 median forecast of analysts polled by Reuters.

The article says "consumer sentiment is seen as a proxy for consumer spending", but I'm not sure. In 2005, Dr. Dean Croushore of University of Richmond argued consumer confidence is "essentially useless for forecasting Americans' spending patterns. ... consumer confidence just reflects the past. You lose your job, your confidence falls. There's not really anything new there."

Every time I see "consumer confidence", I think employment and gasoline prices ... and here are a couple of graphs to show the relationship:

NOTE: On the following graphs, the unemployment rate and gasoline prices are inverted since they are inversely correlated to confidence.

Click on graph for larger image in new window.

The first graph shows consumer confidence and the unemployment rate (inverted).

There is a strong correlation, although it appears confidence leads the unemployment rate (probably because layoffs stop before the unemployment rate starts falling). Maybe a better graph would be monthly changes in employment vs. confidence (I'll look at that later).

The second graph shows consumer confidence and real gasoline prices (CPI adjusted).

Although there are periods when confidence doesn't track gasoline prices, it does appear there is a relationship.

So my guess is the weak confidence reading tells us what we already know - unemployment is high and gasoline prices are rising.

Full post as published by Calculated Risk on April 17, 2010 (boomark / email).