The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

The Confident Weakling

02/29/2012

Yesterday, we learned that consumer confidence has risen to a one-year high, improving from 61.5 to 70.8 in the last month alone.  It is interesting that their confidence has risen at the same time as gasoline prices have risen.  This is unusual.  Their confidence in the improving labor market is greater than their anxiety about rising gas prices.  (I suspect the lack of scary headlines from Europe also contributed to their improved confidence.)

But, does it really matter?  Historically, consumer spending is 65-70% of our GDP.  Increased spending by consumers flows from their increased confidence.  Unfortunately, the U.S. consumer is still so deeply in debt (which they are working hard to reduce) that they cannot significantly increase their spending to match their increased confidence.  That is a major reason this recovery continues to be painfully slow.

The danger is that consumers may start spending before reducing their debts more.  This may be great in the short-run but bad for the country in the long-run.  (Encouraging the weak minded to spend must be a sin somewhere?)

Also, my 2012 forecast was that the market would improve by the second half, as uncertainty declines over Europe, China, and the presidential election.  To my relief, uncertainty over both Europe and China is declining.  However, to my surprise, economists are already debating whether uncertainty over the election has started to decline, because the average investor is assuming President Obama will be elected.  Most economists agree the market will go up, regardless of who is elected, but expect it will rise more if Romney is elected.  One can only wonder if this is also good in the short run but bad in the long run . . . or not?

Anyway, I’m tired of being a weakling . . . see you at the gym!

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