Consumer confidence plummets. Should you worry?

Consumer confidence falls to lows not seen since depths of Great Recession. Such drops in consumer confidence often forecast falling growth.

Paul Sakuma/AP
A young shopper peers into a box containing a CAT motorized job site machine, as he waits to get through the check-out at Costco in Mountain View, Calif., earlier this month. A private research group said Aug. 30, 2011, that consumer confidence dropped almost 15 points to the lowest level since April 2009.

Consumer confidence fell in August to its lowest level since the depths of the Great Recession, according to a new report. So what are consumers telling us?

In a word, the future of the economy looks crummy. And when consumer confidence plummets, economic growth usually has a way of going south as well.

“We're definitely on heightened alert for a double-dip recession,” says Eric Sims, an economics professor at the University of Notre Dame in South Bend, Ind.

Of course, August has been a wild month. The United States teetered on a technical default while Congress dithered until the last moment. The government’s credit rating was downgraded by Standard & Poor’s. Europe’s leaders huddled to try to corral – again – a debt problem that is spreading to Italy and Spain. World stock markets plunged, recovered, plunged again on debt jitters and increasingly negative economic news, giving investors a roller coaster ride that sapped confidence even more.

It’s possible that August was so wild that consumers are overreacting to the bad news. Consumers’ assessment of present conditions decreased only modestly from 35.7 to 33.3 , according to The Conference Board’s consumer confidence survey, released Tuesday. But the index measuring their expectations for the next several months plummeted from 74.9 in July to 51.9 in August. The composite consumer confidence index now stands at 44.5, the lowest reading since April 2009.

A key question is whether all this negativity feeds on itself. According to this view, consumers who don’t feel confident about the future reduce their spending, which in turn trims retail sales, creating fewer profits with which to hire people, which makes it harder to find a job, which keeps a big pool of unemployed from spending, and so on. Everyone suffers.

“It becomes a self-fulfilling prophecy,” says Maury Harris, chief US economist for UBS, a Swiss-based financial services company.

But there’s not strong evidence for that view, other economists say. Even if a negativity loop does exist, it doesn’t last long because the economy adjusts quickly, Mr. Sims says. A store with fewer customers would hold a sale, encouraging more consumers to buy.

What consumer confidence numbers – and another consumer sentiment survey by the University of Michigan – really provide is a broad assessment by thousands of Americans about what the economy is doing and is likely to do, he adds.

Sure, Americans may not know the latest unemployment or GDP, but they do know things that regular economic indicators can’t measure – whether their company is likely to be hiring or firing in the next few months, for example. And that perspective, multiplied by thousands of people, produces important insight into what may happen for the economy in the coming months.

That makes consumer confidence a leading indicator.

It isn’t perfect. Confidence famously plunged along with the stock market in 1987, but a recession never materialized.

Overall, though, confidence tends to be lower at the beginning of US recessions, which means analysts will be watching closely to see if September’s confidence numbers confirm August’s dour outlook – or begin to recover.

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