Early this week the market dipped sharply after The Conference Board said its consumer confidence index fell to 46 in February from 56.5 in January. Economists polled by Thomson Reuters before the release expected a reading of 55.

Investors regularly hear about reports on consumer spending, consumer confidence or consumer sentiment. The reason these numbers are closely watched by Wall Street and by business and government leaders is that consumer spending is the dominant driver of our economy.

A recent USA Today article noted that according to data from the U.S. Bureau of Economic Analysis, consumer spending accounts for 71% of U.S. Gross Domestic Product (GDP).  In simple terms, that means that the best way to keep the economy out of recession is to keep consumers buying goods.

So the latest report that consumer confidence is falling is a pretty big deal. A consumer confidence index reading of 90 or above would show that the economy is on solid ground. A reading of 46 is a significant cause for concern.

The private organization that conducts the survey—The Conference Board—has provided information and analysis about management and the marketplace for more than 90 years. The Consumer Confidence Survey® is based on a representative sample of 5,000 U.S. households.

In a press release accompanying the February 23 announcement, Lynn Franco, director of The Conference Board Consumer Research Center, said: “Consumer confidence, which had been improving over the past few months, declined sharply in February. Concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level in 27 years (Feb. 1983, 17.5).

“Consumers’ short-term outlook also took a turn for the worse, with fewer consumers anticipating an improvement in business conditions and the job market over the next six months. Consumers also remain extremely pessimistic about their income prospects. This combination of earnings and job anxieties is likely to continue to curb spending.”

There was plenty of additional data reported, but the bottom line is that even though there are statistics and reports showing that the economy is improving, many consumers are still worried about the stability of their jobs and their incomes. In that type of environment, the natural reaction is to try to curtail spending.

In another event Tuesday, former Federal Reserve Chairman Alan Greenspan told attendees at the Credit Union National Association conference that the economic recovery has been extremely unbalanced. According to a Reuters report of the conference, Greenspan called the current crisis “by far the greatest financial crisis, globally, ever” —including the 1930s Great Depression.

The former chairman predicted that unemployment will remain near 9% for a prolonged period. “The reason why the unemployment rate is going to be sticky is that as soon as employment starts picking up, a lot of the people who have not been seeking jobs are going to come back into the labor force, and they will keep the official unemployment rate in the 9 percent area, something like that,” Greenspan said.

I am not providing these gloomy forecasts as a means to frighten investors; rather, I want clients to understand why we continue to believe that market conditions warrant an emphasis on protecting assets from market risk.

For several months we have warned investors that a significant market rally did not make sense, given the weakness of the economic data. Among the areas of the economy that still show unusual weakness, Greenspan cited: small businesses doing badly, small banks in trouble, housing starts and auto sales “dead in the water,” and the aforementioned high unemployment rate.

That certainly doesn’t sound like consumers have much to be cheerful about, so perhaps the drop in consumer confidence should not have come as such a surprise. Until that situation changes, any market rallies must be viewed as tenuous.
F.S.