KEY DATA: Confidence: down 1.3 points; Expectations: down 5.1 points; Current Conditions: up 4.4 points
IN A NUTSHELL: "Confidence has been shaken a touch but not nearly as much as might have been expected given the recent economic data."
WHAT IT MEANS: Consumers are hanging in there but they are starting to get a little shaky about the future. The Conference Board's Consumer Confidence Index dropped in February, but not a whole lot. The overall decline, though, hid the sharper changes in views of current conditions and expectations. Strangely, people thought the economy was currently getting a lot better led by more positive views of the labor market and business conditions. But then there is the future: They are getting more worried. People thought the labor market and business activity would soften going forward. Why? Got me. If things were good despite the winter weather, you would think people would be more optimistic about the future, but they were not.
In other reports, both the S&P/Case Shiller and Federal Housing Finance Agency's measures of housing prices increased solidly in December. Case Shiller's 20-city index jumped by 13.4% for all of 2013, the highest increase since 2005. Cleveland was the only city with an increase of less than 6%. Nationally, prices are back to their mid-2004 levels. But it was also noted that the gains have been decelerating lately. The more encompassing FHFA survey had prices up 7.7% over the year, a very respectable showing. Similar to the Case Shiller findings, the increases have been slowing.
MARKETS AND FED POLICY IMPLICATIONS: With the weather crashing all our models, economists have been looking for signs in the bottom of any tea cup and consumer confidence is one of the leaves we look at. This confidence report is weird, to say the least. It was nice to see that the winter did not knock the economy for a complete loop as confidence improved. But it was distressing and surprising to see that expectations tanked. That could point to more cautious spending over the next few months. Investors will not likely react much to the reports as we are completing the earnings season. But they should take heed of the housing price slowdown. Some may think that is good as double-digit price increases are not sustainable. Strangely, many of those same people think the 30% rise in stock prices was rational, so it is hard to take the concern seriously. Rising housing prices have relieved much of the pressure on the housing market and even if we get strong gains again this year, we will still be nowhere near the previous mid-2006 peak. To the extent higher housing prices increases confidence, reduces the number of people underwater and firms the housing market, I will take it and I suspect so will the Fed.