Under normal circumstances, consumer confidence surveys are not very informative. They do not correlate well with consumer spending because consumers respond to what is going on rather than driving it. But in the “new normal,” consumer and business confidence appears to be playing an unusually large role in the recent bout of economic and financial market weakness.
(1966-Q1 = 100)
The S&P 500 plunged sharply during the first several trading days in August when the debt ceiling standoff was coming to a head, and it has been extremely volatile since then. Likewise, consumer confidence plunged in July and August according to the Thomson Reuters/University of Michigan consumer sentiment survey, reaching a level just above the bottom registered in November 2008 when the financial crisis was in full bloom. Although the survey’s September reading rebounded slightly, the three-month moving average continues to point downward. Recessions can be triggered by rising inflation and interest rates, by a bursting market bubble, or by an exogenous event such as the Gulf War in 1990-91. Typically, falling consumer and business confidence is an effect of a recession, not a cause. But in the current environment, falling confidence – particularly in the ability of policymakers here and in Europe to deal with sovereign debt issues – appears to be causing the weakness. Most surveys of retail spending indicate that consumers have not yet given up and retreated into their bunkers despite falling confidence, which raises hope that the economy can skirt a recession. Commercial real estate, though a lagging indicator, is affected by the loss of confidence; tenants need to feel confident in the economic outlook in order to pull the trigger on a multi-year lease, and the same holds true for investors contemplating an acquisition with a multi-year holding period.