A Lesson on Consumer Confidence

This morning’s University of Michigan Consumer Confidence Survey aka The Ann Arbor Housewive’s Report came in pretty weak…

(Reuters) – U.S. consumer sentiment retreated in August from last month’s six-year high, though Americans were slightly more upbeat in their outlook than earlier in the month, a survey released on Friday showed.

The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment slipped to 82.1 in August from 85.1 in July.

The final result did manage to top an initial mid-month reading of 80.0 and beat economists’ expectations for a final read of 80.5.

But here’s the truth. This is a valueless survey. It’s people saying what they feel and not recording what they are actually doing – like those Christmas shopping polls. The problem is, we know that people are terrible forecasters of their own behavior. It’s like asking folks in January if they will lose weight this year.

But more importantly, there is an incredibly high correlation between the direction of the weekly consumer confidence index and the direction of the stock market during the prior week, meaning, if the market rises this week, the confidence survey will almost always rise during the following week. This correlation is not precisely perfect week-to-week, but it’s almost perfect. And on monthly or quarterly timelines it’s that much better.

Last week was not terrible but we’re down 50 points or 3% on the S&P for the month of August. Given the historical linkage, of course consumer confidence was weak.

No one should be falling out of their chair on this report. It is a stock market reaction and the market sucks right now. End of story.