Traders looking for signs that the consumer is still kicking got a clear one Tuesday. The Conference Board’s consumer confidence index rebounded in March to 52.5, up from 46.4 in February, and well above economists’ expectations of a 51.0. The jump followed a 10-point drop in February, which had left the index at its lowest level since April 2009. A reading above 90 is considered healthy and above 100 suggests strong economic growth.

Still, there is a difference between still kicking and thriving. Lynn Franco, director of the Conference Board’s Consumer Research Center, said the index had recovered most of its February decline but warned the gains should be put in context. “Consumers continue to express concern about current business and labor market conditions,” she said in a statement. “And, their outlook for the next six months is still rather pessimistic. Overall, consumer confidence levels have not changed significantly since last spring.”

Traders appeared to agree, easing off stocks after the release of the report. A particularly surprising reading of the index can cause large swings in short-term trading because consumer spending represents such a significant portion of U.S. economic activity (about two thirds of the gross domestic product). “It will take a fairly negative number to set the market back on its heels,” says Bruce McCain, chief investment strategist at Key Private Bank.

Heading into today, mixed data had left traders uncertain over how the consumer was recovering over the last couple months. In February, for example, retail sales rose while consumer confidence declined. “You might be seeing pent-up demand, and people who have jobs are spending to a certain degree, but the confidence data seems more forward looking,” says Brian Sozzi, a research analyst at Wall Street Strategies, an independent equity research firm. “I don’t think retail sales can continue to go up in straight line.” At the start of the second quarter, job creation and increased access to credit will be necessary to sustain retail sales, he says.

Recently, consumer activity has been a murky barometer of the recovery – in part because consumers seem to be defying economic conditions. Despite a high unemployment rate and mounting foreclosures, consumer spending rose slightly in February, according to data released yesterday by the Commerce Department. The uptick came despite no change in personal income from the prior month, suggesting the gain was mostly funded by running down savings rate.

“What we find in the markets and in consumer spending in general is that people don’t really operate in a consciously rational basis,” says McCain. “It’s much more based on a good feeling or if you really believe the economy is improving enough and that your circumstances will improve that [makes you] willing to spend more aggressively.” 

This article is an excerpt from our Early Bird markets story, which was originally published the morning of March 30.
 

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