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Three days of sun over the Memorial Day weekend in America has gone to investors’ heads. On Tuesday morning they were confronted with two nuggets of economic news. Firstly, house prices across the country are still plummeting. No ifs, no buts. The root cause of the financial and economic meltdown – and arguably the most crucial metric needing to improve before the world can emerge from its funk – remains unequivocally negative.
But equity markets rallied. Why? Because of later news that a sample of 5,000 households are more confident than they were last month. The Conference Board Consumer Confidence Index for May came in at 55, considerably above consensus and 14 points higher than April’s reading. Investors choosing to place their faith in this index at the expense of the house price data, however, may be making a grave mistake.
Consider the confidence numbers more carefully. For a start, a reading of 55 is still woefully low (as bad as the early 1990s recession) and corresponds to a level of consumption that barely moves the economic needle. More worrying is that the most of the rise in the overall index is due to a huge jump in the Expectations Index. Consumers’ assessment of current-day conditions, on the other hand, improved only marginally. For example just 9 per cent of respondents are claiming business conditions are “good”, while 45 per cent (also an increase versus last month) are still saying things are “bad”.
So investors are pinning their hopes on other people’s hopes that things will get better. These are probably the very same people who were confident about property prices two year’s ago. Sure it is important to identify turning points and markets are forward-looking. But the truth remains that the hard data – house prices, unemployment, trade and corporate profits and inflation – all remain dreadful. Consumers can dream all they want.
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