Consumer Confidence: Another Plunge That Shouldn't Worry You

A dreadful consumer confidence report from the Conference Board sent stocks down about 1 percent immediately after it was released Tuesday morning - the headline figure fell to 44.5 in August, the lowest level since just after the bear market low in April 2009, from 59.2 - but prices recovered nearly as fast.

Very weak readings in polls of consumers' mood can be bullish for stocks, as mentioned in this recent post, and a note to clients by Bank of America-Merrill Lynch, issued in response to the confidence number, suggested that the Conference Board data are not as bleak as they seemed at first:

"Digging deeper into the report, we find that consumers' buying attitudes do not reflect their confidence levels. In particular, we find that more consumers - 12.9 percent in August versus 11.9 percent in July - plan to purchase automobiles over the next six months. For the first time since September 2010, more than 50 percent of respondents plan to purchase a major household appliance such as a refrigerator, TV or a washing machine. The number of respondents planning to take vacations ticked up noticeably, to 46.8 [percent]. There is clearly a [discrepancy] between the headline consumer confidence figure and the other details in this report."
Merrill's economists appear to have concluded that the sharp drop in consumers' attitudes reflects disgust over recent political developments more than armchair economic forecasting:

"We shouldn't be seeing more consumers planning to take more vacations or purchase large household items if they truly thought that another recession was on its way. Like many other 'soft' indicators, we think the drop in sentiment in August was a result of the dysfunction in Washington over raising the debt ceiling and also [Standard & Poor's] downgrading of the US's credit rating."
One disturbing element of the report is that the component that reflects attitudes about the future fell far more - to 51.9 from 74.9 - than the one measuring current conditions. That could be a precursor to the public talking its way into a recession. That aside, the report and others like it show more panic than genuine reasons for panicking.