Despite Fiscal Shadow, Consumer Confidence Rises

Despite stagnant incomes and the threat of fiscal contraction scheduled for the end of the year, consumer confidence rose again in November, reaching its highest level since February 2008.

Source: The Conference Board, via Haver Analytics. Numbers are seasonally adjusted.

Consumer confidence has been rising for the last three months, and the latest pickup was driven by more buoyant expectations for the economy, as opposed to consumers' assessment of current conditions. In fact, for the last four years, consumers have been consistently more positive about the future of the economy than its present, which is the reverse of their attitudes for most of the expansion that preceded the financial crisis.

Consumers over 55 have shown an especially sharp gain in confidence in the last few months, although consumers of all ages are still less positive about the economy than they were before the recession began.

Source: The Conference Board, via Haver Analytics. Numbers are seasonally adjusted.

It's not clear why confidence is picking up in the face of scheduled tax increases and sharp cuts to federal spending, which could choke off all sorts of other economic activity. Perhaps Americans have faith that Congress will reach an agreement and avert a sharp fiscal tightening.

A firming job market and stronger home prices may also be encouraging more optimism about the economy.

As the Case-Shiller house price index showed Tuesday morning, prices have been rising on a year-over-year basis for four straight months. The gains are broad-based, too. Of the 20 cities whose housing prices are tracked each month, only two, Chicago and New York, fell on a year-over-year basis.

Businesses have appeared more shaken by the threat of the so-called “fiscal cliff.”

October orders for durable goods, also reported Tuesday, came in essentially flat. Declines in the transportation sector - motor vehicles, civilian aircraft and defense aircraft orders all fell - wiped out modest gains in other sectors. Shipments of manufactured durable goods fell in October.

Orders of capital goods excluding defense and aircraft (so-called “core” capital goods) rose by 1.7 percent, which was a relief after a slide this summer but still relatively anemic.

In addition to the threat of fiscal contraction, “downgraded earnings projections due in part to weaker overseas growth and recession in Europe offer businesses little incentive to expand capacity,” Paul Edelstein, the director of financial economics at IHS Global Insight, wrote in a note to clients.