This past Tuesday, a day which saw the stock market tumble in reaction to yet another interest rate hike, the Conference Board reported that consumer confidence had bounced up to 107.2, near a four-year high level of 110.3. Who are these happy consumers, and why are they so upbeat? Don’t they read the newspapers? Actually, the picture is a little more complicated, and not quite so rosy.

According to the director of the Conference Board’s Consumer Research Center, Lynn Franco, there are three items that determine the monthly sentiment readings: jobs, jobs, and jobs. Responses to the survey question “Are jobs hard to get?” correlate closely with the unemployment rate, and hugely influence how consumers are feeling about life.

The nonprofit Conference Board has been surveying consumer sentiment for nearly 40 years. The results are taken from about 3,500 responses to a monthly questionnaire sent out to 5,000 families by an organization called TNS. There are five questions, and astonishingly, the questions have been the same over the entire life of the survey, which just goes to show that human needs are pretty basic, and consistent.

Two of the questions ask how consumers are feeling about current business conditions and job prospects, while the remaining three address how they imagine those circumstances might look six months hence. The overall sentiment number, mentioned above, is an average of the five questions.

At the moment, Ms. Franco says, “there is a huge divergence between present and future expectations.” The index of present sentiment stands at 133.3, while the future index has sunk to 89.9. A year ago, the comparable figures were 117 and 93.7. Though not at an all-time high, the gap is wide enough to be sending a message.

Concern about the future often presages a slowdown or recession, Ms. Franco says. Consumers, in other words, are expecting that economic growth may taper off, or, in Ms. Franco’s words, they are wondering, “Is this as good as it gets?”

How smart is the consumer? That is, has the sentiment indicator been a good predictive tool or does it fall into the same category as the Farmers’ Almanac and hemline trends – that is, colorful but not very useful.

Ms. Franco says “the consumer is very well aware of what’s going on,” and she argues that the index has been quite accurate over time. In fact, a chart comparing consumer responses on job availability to the civilian unemployment rate since 1992 shows two lines marching in almost perfect lockstep. After the terrorist attacks of 2001, consumers were more optimistic about employment than they should have been, while since 2003 the job picture has actually outperformed expectations. (Maybe they are reading the newspapers after all.)

Comparing consumer expectations and changes in GDP is more complicated. While consumers certainly appear to have seen the 2001 recession coming, with sentiment plunging in mid 2000, other downdrafts (early 2003, mid-2005) turned out to be false alarms, caused by admittedly upsetting events like the Iraq war and Hurricane Katrina. On the other hand, a swoon in sentiment late in 1992 did a good job of predicting the soft 1993 economy, while perhaps the downdraft in mid-1998 could have been useful in anticipating the fall-off in growth in mid-1999.

The sentiment survey includes some other useful information. Consumers are asked about their expectations of inflation, interest rates, and stock prices 12 months out, which might give economists clues as to future borrowing or investing patterns.

Expected rates of inflation had been between 4% and 5% until last fall, when suddenly consumers were forecasting rates as high as 6.8%.The jump most certainly came from soaring oil prices and dovetailed with a souring view of future stock prices. Less than 30% of consumers expected a rising stock market in September 2005, down from 37% the year earlier. The preliminary figures for this past month indicate that 36.6% of those surveyed think stock prices will be higher 12 months hence. At the same time, there is a growing consensus that interest rates will move higher.

It will not surprise you that young people (under the age of 35) are typically more optimistic than older folks. Nor is it a shocker that people with higher incomes tend to view the world in a rosier way. It is interesting to note that optimism seems to bear a linear relationship with income. For the five income categories noted, each step up the ladder seems almost always to be rewarded with a measurably sunnier outlook. Money may not buy you love, but it sure seems to generate optimism.

The Conference Board also solicits information about consumer spending plans. In the March survey, there was a sequential drop in the number of people expecting to buy a new car, but 4% said they expected to buy a new home, one of the highest responses in a year. Expected purchases of major appliances are also at a high level, confounding those who think the consumer is wasting away.

What do economists do with all this information? According to Ken Goldstein at the Conference Board, academics tend to pooh-pooh the sentiment readings, which apparently add little to the econometric models such savants spin out to predict upcoming trends. However, Mr. Goldstein points out that the sentiment indicators are available a couple of months in advance of hard income data, thus proving valuable for those, such as retailers, who need up-to-date information on what consumers are likely to do. Beyond that, Mr. Goldstein says “we use it as a gut-check.” He says, “If we’re forecasting strong growth and consumer sentiment is trending down, we know something is wrong.’

A senior strategist for JPMorgan Chase & Company, James Glassman, says the Conference Board series confirms “that we are in a transition. The indications are not frightening, but the consumer is definitely slowing. Spending will probably be tracking income more closely, instead of exceeding income, as has been the case for 25 years.”

At the moment, the sentiment index supports the consensus view that spending may slow. What concerns Mr. Goldstein is that the business indicators are showing similar caution, while most forecasters are assuming that business spending will take up some of the slack that may develop on the consumer side. Stay tuned.