Bonds didn't get a chance to rally on news that consumer confidence took another dive in April because stocks got there first.
Oh, sure, there were lots of Johnnys-on-the-spot to explain why the 7.7 point drop in the Conference Board's Index of Consumer Confidence to a four-year low wasn't as bad as it looked.
It was compiled before the Federal Reserve's surprise 50 basis-point inter-meeting rate cut last week. It didn't capture the continued improvement of the stock market throughout April. It will reverse itself next month when consumers incorporate these variables into their outlook.
The truth is, the confidence survey provided good reason to be concerned about the economy, especially for those of us who think it will manage to skirt recession. The present-situation index, which correlates well with the labor market, plunged almost 12 points, its first significant one-month fall since October 1997, when the Asian financial crisis was rattling stock markets around the globe. In fact, the April decline was the biggest since the 24.3-point drop in October 1990, when the economy was four months into recession.
Why is this significant? If the loss of confidence telegraphed by the Conference Board's present-situation index reflects the true state of the job market and not just anxiety about it, it means the economy will start to experience secondary effects: income loss, spending cutbacks, production cutbacks, and more job losses.
It's this spiral that the Fed is hoping to interrupt with its aggressive easing campaign begun on Jan. 3. Unlike the University of Michigan Consumer Sentiment Survey, whose questions are geared toward financial and business conditions, the Conference Board asks specific questions about the employment situation. Half of the present-situation index is derived from respondents' appraisal of current employment conditions. In the April survey, 40 percent of respondents said jobs were plentiful.
At the same time, the number of persons who said jobs were hard to get remains low, rising 1.6 percentage points to 14.2 percent. That compares with an all-time low of 9.6 percent last July.
It's no surprise that this component correlates well with the unemployment rate, which has been rising grudgingly from a three-decade low of 3.9 percent in October to 4.3 percent in March.
The other survey question used to calculate the present- situation index is an appraisal of current business conditions.
Given the subjective nature of a survey, it's easy to see how employment and business conditions might be confused as one and the same. So that brings us back to why bonds can't do anything with the bad news. The usual suspects include an agglomeration of initials: ECI, GDP, HU. The first-quarter Employment Cost Index tomorrow and Gross Domestic Product on Friday are expected to show a deterioration of inflation. HU is the New York Mercantile Exchange's designated symbol for unleaded gasoline, which rose to within a penny of last year's 10-year high following an explosion at a California refinery.
Gasoline inventories are 4 percent below year-ago levels, demand is up, refinery runs are approaching flat out, and the summer driving season hasn't even begun.
Now, most folks are convinced that any inflation will be a temporary phenomenon, given the fall-off in demand. The bond market is starting to suggest otherwise, even as the law of diminishing returns kicks in.
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