Consumer confidence lags home price rise

INDICATOR: August Conference Board Consumer Confidence/June S&P/Case-Shiller Home Prices

KEY DATA: Confidence: 81.5 (up 0.5 point) /Case-Shiller: up 0.9%; Year-over-Year: +12.1%

IN A NUTSHELL: "Confidence is not rising very rapidly even with home prices still rising sharply."

WHAT IT MEANS: This is still a consumer-based economy so we really do need to worry about what people are thinking and feeling. Right now, consumer confidence continues to improve but not at any great pace. The Conference Board's measure of household optimism ticked up in August but the details did not raise hopes of any great improvement in the future. Workers thought that current job and business conditions were not as good as they had been and looking outward, they were also uncertain. What was good news in the report was rising belief that income would grow. Indeed, income expectations rose to their highest level in about thirty months. There was also growing expectations that the labor market would firm, another reason to be somewhat optimistic about spending.

As for housing, you would think that confidence would be booming if you just looked at the housing price numbers. The S&P/Case-Shiller home price index jumped again in June and continues to post double-digit gains from 2012 levels. However, conditions may be cooling a touch. Five of the twenty metropolitan areas surveyed posted declines over the month compared to only two in May. You cannot draw any major conclusions from that just yet but with mortgage rates rising, it will be interesting to see if the monthly increases continue to moderate.

MARKETS AND FED POLICY IMPLICATIONS: Improving consumer confidence is good especially when people are more confident about jobs and income. But there is still a lot of uncertainty out there. Undoubtedly, the continued strong gains in home prices should bolster household outlooks but we are entering the Twilight Zone, the place between reality and economics where Congress shows how out of touch with the world it is. Another ugly budget debate and we could see the fragile increase in confidence disappear. So I will wait and see what comes out of Washington before I make any judgment on consumption and economic growth. Yes, that sounds like an economist talking but given what our politicians did to the economy (and my economic forecast) this year, it is only logical to sit back and see if we have another episode of chaos.