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First Cut: Drop in January Consumer Confidence Index likely temporary, but full rebound may not follow

The Conference Board’s January Consumer Confidence index fell to 120.2 from a revised 126.6 in December (previously 128.1). The level was the lowest since 120.0 in July 2017. By no means should this be interpreted as a weak number, just one that is off unsustainable highs that marked much of the second half of 2018. The sharp drop from the near-term peak of 137.9 in October 2018 is in part a reflection of a reset in business activity to a lower pace late last year and more recently the negative impacts of the partial government shutdown. I would anticipate the February numbers will retrace most of the decline with a rebound in six-month expectations, but not wholly with the threat of another funding impasse looming and/or an emergency declaration out of the White House to build border wall.

The present situation index – which accounts for roughly 1/3 of the overall measure – was essentially unchanged at 169.6 in January after 169.9 in December (previously 171.6). It was in six-month expectations that the decline was concentrated with an over 10-point fall to 87.3 from 97.7 in the prior month (previously 99.1).

In January, the subcomponents related to expectations were all lower and particularly gloomy for business conditions and employment. Confidence in present employment was down a bit, but present business conditions were slightly positive.

It has been strength in the labor market and expectations of continued gains in personal income that have buoyed consumer confidence in the past year. With moderation in business conditions and anticipation of slower economic activity that may lead to fewer jobs and less pressure for businesses to hike wages, consumers may turn more cautious. This is not to say there will be a collapse in spending, but some discretionary purchases may be put off or downgraded.

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