Big Drop in Consumer Confidence Makes S&P 500 All-Time High Hard to Justify

The Conference Board has released some disappointing data regarding the confidence of American consumers. Some of the outcome may seem obvious because of how the enhanced unemployment talks in Washington, D.C., have stalled and are not expected to materialize. That said, the drop looks worse than what was generally expected, and it is at the same time that stocks hit new all-time highs.

The Consumer Confidence Index fell to 84.8 in August, and that is after it declined to 91.7 the prior month. Econoday had the consensus estimate as 93.0, and the Wall Street Journal had a consensus estimate of 92.5 ahead of the release.

The Present Situation Index is the overall assessment of current business and labor market conditions, and this led the big part of the drop as it fell from 95.9 in July to 84.2 in August. Consumers stated in their surveys that both business and employment conditions had deteriorated over the past month.

The Expectations Index is the assessment of the short-term outlook for income, business, and labor market conditions in the coming months, and this was less of a decline as it fell from 88.9 in July to 85.2 in August.

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While stocks have been hitting highs, the cut-off date for these preliminary results was August 14. That was a time when the number of COVID-19 cases were still more of a concern.

Consumers’ optimism about the short-term outlook and their financial prospects both declined to lead the index lower. Consumer spending had been rebounding in recent months, but a growing concern about the economic outlook and financial well-being are suggesting that spending levels likely will drift lower in the coming months.

Consumers’ assessment of present-day conditions slipped in August, and consumers were also more pessimistic about the short-term outlook and the job market. These were how some of the more detailed outlook questions were seen in August (versus July):

• The percentage of consumers claiming business conditions are “good” fell from 17.5% to 16.4%.
• Those claiming business conditions are “bad” increased to 43.6% from 38.9%.
• The percentage of consumers saying jobs are “plentiful” declined from 22.3% to 21.5%.
• Those claiming jobs are “hard to get” increased to 25.2% from 20.1%.
• Those expecting business conditions to improve over the next six months fell from 31.6% to 29.9%.
• Those expecting business conditions will worsen grew from 20.2% to 20.5%.
• Those expecting more jobs in the months ahead fell from 29.6% to 29.1%.
• Those who anticipated fewer jobs increased to 21.9% from 21.3%.
• The percentage of consumers expecting an increase in their short-term income prospects declined from 14.8% to 12.7%.
• The percentage of consumers expecting a decrease in their short-term income prospects rose from 15.8% to 16.6%.

It seems odd that the consensus would have been looking for an improvement when the stimulus talks failed, but this certainly explains the drop in the stock market while stocks were just sitting at record high levels. The S&P 500 had been higher this morning, and the index hit a new all-time high of 3,439.16, but that index was last seen down about three points to 3,428.25 in the wake of this disappointing report.

Declining consumer confidence is expected to be followed by weaker consumer spending. With close to 70% of the gross domestic product before the recession being tied to consumer spending activity of some sort, this and the lower income to the more than 10 million unemployed workers is likely to weigh on third-quarter GDP expectations.

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