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Rising Consumer Confidence No Indication of Recovery


But it's a promising sign with which to enter the New Year.


The consumer sector received both good and bad news yesterday.

The good news was that US consumer confidence improved more than expected in December, reaching a three-month high. It comes as welcoming news as it indicates that Americans are less frightful about the state of the economy, and it helped retailers across the board, including American Eagle (AEO), Buckle (BKE), and Aeropostale (ARO) post gains on a day the overall market slipped.

Unfortunately, the bad news came in the form a longer list:

  • Consumers rated their present situation the worst since February 1983

  • The "jobs plentiful" index dropped to its worst level since 1983

  • Credit card debts written off as uncollectable rose in November to 12.6% -- they're expected to rise to 12% to 13% by mid-2010

  • The payment rate -- percentage of principal balance card holders pay each month -- fell nearly 90 basis points

It's not that surprising that consumer confidence rose in November. November is the heart of the holiday shopping season and consumers are more likely to be feeling more at ease about the economy. And while it may sound good in theory, higher confidence levels won't necessarily translate to a more favorable consumer environment.

Consumers may be less pessimistic about the prospects of our economy's future. However, they're still deeply feeling the effects of the recession. A large percent are still jobless. They're still cash-strapped and living by a frugal mentality. Many are still defaulting on credit card bills -- a less than favorable sign for the likes of Mastercard (MA) and Visa (V). And at 52.9, the consumer confidence level is still a far cry from 90 -- the level of a healthy economy.

Consumers are still in recuperation stage. The consequences of reckless shopping habits are still evident and pre-recession spending levels buoyed by credit aren't attainable anymore. Thus, don't expect retailers to be rescued by upbeat consumers. The law of supply and demand has yet to be fully played out and the failure of demand to fully recover will delay the sector's recovery.

Rising consumer confidence doesn't indicate recovery, but it's a promising sign to enter the New Year with. If job recovery can emerge throughout 2010 -- a key factor in determining consumer confidence -- we can expect to see consumers dig a little deeper into their pockets by time the holidays roll around next year.

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