An adage among economists is that recessions are crises of confidence. Consumer confidence tumbled to its lowest in 28 years this month, a survey showed on Friday, as short-term inflation expectations reached the highest levels since the stagflationary early 1980s.
The news heightens the dilemma for the Federal Reserve, which has bet that slowing economic growth will tame inflation pressures. The report also showed that lower-income households were the focus of the downturn in sentiment. The Reuters/University of Michigan Surveys of Consumers’ preliminary index of confidence fell to 59.5 in May, the lowest since June 1980. In April it was at 62.6.
This data is somewhat disturbing given that consumer confidence is usually correlated with the necessary consumer expenditures to drag an economy out of recessionary times.
And yet, just a couple of days ago, I reported that that the Commerce Department’s retail-sales report showed an overall 0.2% decline BUT exhibited a 0.5% increase when auto sales were excluded.The resilience of the consumer seen in that report is particularly encouraging given that this number largely represents spending that occurred prior to the receipt of the economic stimulus rebates. While it’s conceivable that some spending may have been pulled forward in anticipation of the rebate checks, survey responses and historical experience suggest these outlays occur only after the checks have been received.
The bottom line…we need to keep close tabs on all of these indicators. It’s also an election year which means that some consumers will be very happy with the outcome and others not so cheerful. Either way, you might want to check out my February 18 post on how to combat falling consumer confidence.