There's a surefire way to undermine an economy: (1) Scare people. (2) Wait. As James Madison put it: "The circulation of confidence is better than the circulation of money."
Here's the good news: Consumer confidence rose in November to the highest level since June, and is now more than double the level of early 2009.
But here's the bad news: By any measure, it's still terrifyingly low:
Source: Capital IQ, a division of Standard & Poor's.
No question: Consumers are still freaked out.
A few notes about consumer confidence:
1. It's a coincident indicator, meaning it tells you what just happened, not what's going to happen in the future. If it offers any predictive insights, it's that it tends to be a good contrarian signal. Buy on the cannons, sell on the trumpets.
2. It's highly correlated to the stock market. The lack of jobs is what's keeping confidence low. But confidence also tends to follow the stock market lockstep. Part of this is likely because the Dow is most people's economic barometer; it's easier to follow than, say, GDP or manufacturing. Whatever the market's doing, that's how people tend to feel about the economy. Confidence peaked during the last business cycle in late 2007 just as the Dow topped 14,000, and bottomed in February 2009 when stocks collapsed and companies such as Ford, Citigroup, and Sirius XM were on the verge of explosive rallies.
3. Extreme confidence is a cancer. There's a subtle but important difference between optimism and confidence. At the risk of oversimplifying: Optimism is the belief that we will work through our problems. Confidence is the belief that there will be no problems. Optimism leads to long-term opportunity; confidence breeds complacency. The seed of most financial crises is extreme confidence.
Now here's what's interesting. Consumer confidence is still about half of where it was before the recession. Yet CEO confidence has regained nearly all its lost ground:
This might seem like a paradox -- why are consumers so scared if their bosses are so confident? -- but it sums up the state of the economy nicely. Consumers are scared because there are no jobs. CEOs are optimistic because they don't have to pay for jobs. Employment is abysmal, yet corporate profits are at an all-time high. Or really, corporate profits are at an all-time high largely because employment is abysmal.
Another reason for the gap: The business landscape is increasingly global. The source of corporate profits, and CEO confidence, could be burgeoning sales in Brazil or Asia, not the economic condition of the U.S., which is the foundation of consumer confidence. For example, Yum! Brands'
I had a chance to talk with CNBC anchor Maria Bartiromo last month while researching another article. "If you are confident about your job, chances are you will spend money, which is critical to economic growth," she said. "If a CEO is confident about demand and about an economy, chances are he or she will invest in R&D and Information Technology."
That's all well and true. But few people feel good about their jobs right now, and CEOs are indeed investing -- overseas.
It's hard to be confident in that situation. Just try to stay optimistic.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.