It's All About Confidence

The Conference Board in the United States today released an update of its periodic and closely watched Consumer Confidence Index, and the number continues a trend begun in April of climbing higher from its February trough.  (Oddly, the data are becoming more polarized, with a larger percentage claiming that current conditions are "good" AND a larger percentage claiming conditions are "bad".)  Interesting data, especially when one notes that the basis is "consumer confidence", not actual market conditions or performance data.  Those data are decidedly more mixed in nature.  

But, in our post-industrial economy, maybe cognitive and emotional factors like "confidence" count for more than data rooted in tangible fact.  What difference would it make, say, if banks were again loaning businesses money and stock exchanges were inching steadily upward, yet consumers refused to buy?  In the end, maybe confidence is the most salient variable to track as a leading indicator of future economic activity.  While some of the contraction in the economy during recent months has been from foreclosures, bankruptcies, and layoffs, a large part--perhaps most--has been from people feeling less affluent and thereby buying less.

And feeling more or less affluent is very important!  The National Association of Independent Schools (NAIS) uses an "Affordability Index" to help its members gauge how many families in their market can afford a private, independent education for one, two, or more children.  The index is, as it should be, based on hard data; e.g., real income, cost of living, tuition, etc.  A softer number, and one that would be far more challenging to measure, is the "perceived affordability", based not on real income but on a family's perception of its affluence.

Without getting into potential metrics, it seems reasonable to say that the perceived affordability index has floated slightly about the real affordability index for some time (Alan Greenspan's irrational exuberance).  Since last summer, it seems equally reasonable to say the perceived index has been well below the real one for the vast majority of families in independent schools.

So, The Conference Board data should inspire some hope; maybe even more so than an upturn in durable goods orders or news that the Dow had again risen above 10,000.  On the other hand, confidence is exceedingly fragile, and there is much in our unstable world that could easily erode the gains since winter.  Be cautious.