The Misleading Nature Of Consumer Confidence Surveys

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This photo was taken last week immediately after my first $60 tank of gas.  I mumbled under my breath for a few minutes, then called my wife.  I wasn't angry, mind you.  Just mindful of the fact that I spent $60 on a tank of gas.

Multiply my incredulity times all of the drivers in the country and you'll understand why consumer confidence is at its lowest point since 1980.  When life's staples get costly, it tends to make people nervous about their personal budgets.

Budgets and sentiment are a big deal to market players because consumer spending accounts for 70 percent of the U.S. economy.  When confidence is weak, Americans tighten up the purse strings and grind the economy to a halt.

Or so we're told.

Since January 2007, the stats tell a different story:

• Consumer Confidence: Down 35.4 percent
• Retail Sales (excluding cars): Up 5.3 percent

Despite plummeting confidence, in other words, the American Consumer is undeterred. 

We complain about high gas prices and make (vocal) sacrifices in our lives, but we still manage to spend our money on things.  It's what keeps the economy moving ahead and is one of the major reasons why the economy avoided recession earlier this year.

Consumer confidence is a better gauge of the world around us than an economic predictor.  And so long as spending continues, the economy should continue to expand. 

In the short-term, this is good for mortgage rates because a stable economy attracts foreign investment dollars.  Any time that demand for mortgage bonds is high, rates will be pressured lower.

In the medium-to-long-term, though, the outlook is not so favorable for rates.  Healthy spending could spell trouble for the Federal Reserve as its prior rate cuts work their way through the economy. 

It's only now -- 8 months later -- that the September 2007 cuts are impacting the U.S. economy.  There have been six additional cuts for a cumulative 2.75 percent since then.  If spending continues unabated, the Fool in the Shower scenario about which we talk so often will likely come to fruition.  Interest rates on long-term, fixed-rate mortgage products would rocket higher.