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Correction in Consumer Confidence May Be Looming

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New research reveals there is likely to be a downward correction in consumer confidence, which could negatively impact retail sales and other consumer activity in the coming months. 

According to the LegalShield Law Index for June, the Financial Stress Index remains at historic lows, and continues to be a significant divergence between the “hard data” (i.e., usage data based on actual consumer behavior) captured by the Index and the “soft data” (i.e., survey data based on consumer attitudes and expectations) captured by consumer confidence measures.

This divergence suggests that consumer confidence is likely to decline and come in line with the LegalShield Consumer Financial Stress Index in the next one to three months, as it has in the past, most notably in the 2008 recession.

Markets are in “wait and see” mode as Federal Reserve Chair Janet Yellen prepares to testify later this week, and the possibility of a correction in consumer confidence has potential implications for the Federal Reserve’s decision about whether to raise interest rates or wind down the Fed’s balance sheet. The LegalShield Law Index sheds new light on this decision, as it suggests that consumer confidence may be temporarily inflated.

Specifically, the LegalShield data point to a correction in consumer confidence that will bring it into closer alignment with market realities by the fall.

The LegalShield Law Index joins other leading economic indicators in providing a forward-looking snapshot of the economic and financial status of U.S. households and small businesses. The Index is made up of five indices, including the LegalShield Consumer Financial Stress Index, LegalShield Housing Activity Index, LegalShield Bankruptcy Index, LegalShield Foreclosure Index, and the LegalShield Real Estate Index. To depict the health of the U.S. economy, each index relies on LegalShield’s unique and proprietary database of member demand for and usage of legal services.

The key predictive takeaways from the first public release of data, through June 2017, are as follows:

• Consumer confidence should ease in the next one to three months, but will likely remain strong by historical standards given that consumer financial stress remains muted relative to its long-term average.

• Housing construction — which has risen at a stubbornly slow pace since 2012 and remains well below pre-recession levels — may pick up in the months ahead.

• Bankruptcies are likely to remain muted in the near term. However, bankruptcies may well increase in the medium term, particularly if certain measures of financial stress (e.g., student loan debt, auto loan debt, or credit card debt) begin to climb.

• Foreclosures should remain subdued in the short term, but may begin to rise in the second half of the year.

• Home sales should continue to slowly improve in the months ahead. However, a strong sales resurgence is unlikely to occur in the near term.

The five LegalShield indices closely track a handful of key economic indicators, such as the Consumer Confidence Index (developed by the Conference Board), Housing Starts (reported by the U.S. Census Bureau), and Foreclosure Starts (reported by the Mortgage Bankers Association). Each LegalShield index has undergone a battery of statistical tests overseen by a PhD economist to validate its relationship to an existing economic indicator that sheds light on the health and direction of the U.S. economy. LegalShield will publish the Law Index monthly, on the sixth business day of each month.

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