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Why is confidence, or a lack of confidence, so important when it comes to the economy? Just like some diseases spread through being contagious, so does confidence. You’re at a party and overhear someone, or hear of someone, who says, “You know, things are getting better…” And so you start to look for signs to verify that. When people are confident they will go out and buy, invest, and lend.

Math-a-letes, far smarter than me, have developed correlation models between how confident the public is, shown in various surveys, and the GDP of a country. And in fact if you look back at the depressions in the 1890’s, or 1930’s, what is obvious is a lack of confidence, and people are distrusting. (In the dictionary “confidence” means trust or belief, and in fact comes from the Latin “fido”, meaning “I trust”. “Credit” comes from credo in Latin, meaning “I believe”.

The Conference Board’s Consumer Confidence Index dropped to 49.3 in June from 54.8 in May. Based on that alone, you would believe that the economy is not out of the woods yet - which is probably true.

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The S&P/Case-Shiller Home Price Index of 20 U.S. Cities decreased 18.1 percent in April from a year earlier following an 18.7 percent drop in March. But the measure was down 0.6 percent in April from the prior month, the best performance since June 2008, and eight of the 20 cities showed an increase in prices from March.

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In the last 12 months the worst performers were Phoenix (-35 percent), Las Vegas (-32 percent) and San Francisco (-28 percent). In more news, the Purchasing Managers Manufacturing Activity index rose to 39.9 percent in June from 34.9% in May, although a reading below 50 indicates a continued contraction.

Pending Home Sales increased .1 percent in May and up 4.6 percent versus a year ago. Construction Spending dropped .9 percent in May to its lowest level in 5 years, worse than expected, but the Institute of Supply Management Manufacturing Index rose to 44.8 from 42.8. On top of all of that, Federal Reserve Bank of San Francisco President Janet Yellen said that overnight rates could remain at .25 percent or lower for a few years.

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But employers cut 467,000 non-farm payroll jobs in June, far more than expected, while the nonfarm unemployment rate rose to 9.5 percent - the highest since mid-1983. May’s numbers were revised down, but April’s were revised upward. We also had Jobless Claims, which dropped 16,000 - better than expected. But what will grab the headlines, and probably push the bond and stock markets, is the Non-farm Payroll number.

The Conference Board said, “After back-to-back months of strong gains, Consumer Confidence retreated in June. The decline in the Present Situation Index, caused by a less favorable assessment of business conditions and employment, continues to imply that economic conditions, while not as weak as earlier this year, are nonetheless weak.”

What is it that will return confidence to prior levels? Certainly interest rates are still at record levels, and fewer jobs have been lost in June. Any improvement in the unemployment rate will certainly boost consumers’ confidence. But since that won’t probably happen until next year, we can hope that the stock market rally and boosts from the stimulus spending will provide some feeling of increased wealth for consumers.

Harlan Green © 2009