So-So Confidence and Economic Outlook

As consumer confidence wanes after four consecutive months of declines, an S&P report suggests that there are four possible economic recovery scenarios.

Consumers in June feel the economy will remain the same short term, but are less upbeat about their outlook over the next six months.

This story first appeared in the June 27, 2012 issue of WWD.  Subscribe Today.

June’s Consumer Confidence Index fell again, representing the fourth consecutive month of moderate declines.

The Index, representing the Conference Board’s monthly survey of consumer confidence, is now at 62, down from 64.4 in May. The Expectations Index dropped to 72.3 from 77.3, while the Present Situation Index rose to 46.6 from 44.9 last month.

Lynn Franco, director of economic indicators at The Conference Board, said, “Consumers were somewhat more positive about current conditions, but slightly more pessimistic about the short-term outlook.”

Franco concluded that the improvement in current conditions, coupled with moderate softening in expectations, could mean “little change in the pace of economic activity in the near-term.”

In a separate report called “U.S. Risks to the Forecast: Lazy Hazy Crazy Days of Summer,” Standard & Poor’s Ratings Services estimated the “odds of a double-dip to be 20 percent, down from a 25 percent risk in February and half the 40 percent high [it] estimated in [its] September Financial Notes report.”

S&P’s latest report presumes as a baseline a slow recovery from the June 2009 recession trough, but raised the question of two other scenarios: A typical “V”-shaped expansion or an “L”-shaped recession where the economy stagnates for years.

While the risks have diminished, they have not disappeared. The S&P sovereign team in the euro zone estimates a one-in-three risk of a Greek exit. In the U.S., job market improvements have reversed and there are increasing worries those gains were only temporary. Those factors plus other such as a limp housing recovery will likely keep the economic “recovery subdued,” the report concluded.

In a downside scenario, a double-dip recession possibility “takes hold in the third quarter of this year,” with the U.S. recovery halting as the euro zone tackles fiscal austerity, political issues and a credit crunch.

In a more positive scenario, an improving job market and a more rapid calming of the financial markets help relieve the strains on the U.S. economy. Moreover, consumer spending rebounds more than expected as Americans live beyond their means.

While the S&P report raised the possibility of a Japanese-style decline for years, it didn’t put forecast numbers to this fourth scenario because it was viewed as beyond the five-year economic projection of the study. There are also two diverging differences that make a comparison difficult: Japanese consumers sharply increased their saving rate, and U.S. health care costs are a greater fiscal risk that wasn’t apparent in Japan in the early Nineties.