There's no silver lining to this news: if spending follows sentiment, then the U.S. economy is in big trouble
What recovery? That must have been the question stuck in the minds of most Americans as consumer confidence fell dramatically this month, to its lowest level since March 2009. It was the biggest one-month drop since October 2008 -- when the financial crisis hit its climax. This disastrous result should have economists and policymakers sweating. Without the American consumer on board, the economic recovery doesn't stand a chance.
Here's the chart for the Conference Board's Consumer Confidence Index, going back to when the recession began:
In August, the index plummeted 14.7 points to 44.5. You can see pretty clearly from the chart that confidence has rarely dipped below 50 since mid-2009. Certainly, in a recovery it should be much higher. This level of sentiment is what you would expect to see as the economy is shrinking -- not expanding.
Most of the reason why sentiment fell so drastically stems from expectations weakening. Although consumers said their present situation was slightly worse in August than in July, they had a much more pessimistic view of the future, according to the Conference Board.
The research firm points to the U.S. government as the main reason for poor sentiment. Its director of research Lynn Franco says that much of the pessimism stems from the debt ceiling debacle and subsequent sovereign debt rating downgrade by Standard and Poor's.
You could probably add a few other factors to this list, however. Stock market volatility certainly isn't helping to calm consumers. The federal government entered a period of austerity and the Federal Reserve shook its head at additional stimulus this month, which might leave Americans feeling like the government isn't going to do anything else to try to remedy the severe unemployment problem. We also learned that the first half of 2011's growth was extremely weak at just 0.67%. Finally, consumers who thought rising prices -- largely blamed for the summer slowdown -- were finally declining probably weren't thrilled to see inflation resume in July.
This very weak level of sentiment implies that we may see spending decline this month. That's particularly disappointing since it rose rather strongly in July, after falling in the prior three months. If consumers pull back in a meaningful, prolonged fashion, then a double dip will probably be unavoidable. Consumer spending makes up a huge chunk of GDP. It also serves as the single most important factor that could cut the unemployment rate. Firms aren't hiring because the demand they're seeing is weak enough that their current employees produce enough already.
As the above chart also shows, however, the Confidence Index tends to be volatile. But even among its ups and downs, a plummet like this is quite rare. Unless we see a huge uptick in September, confidence will remain very low. If the debt ceiling, S&P's rating downgrade, and stock market volatility are largely responsible for the pessimism in August, then we could see some improvement in September. Of those factors, the first has been resolved, the second has had little tangible, direct impact on the market, and the third doesn't seem as severe as it did a few weeks ago. Unfortunately, we haven't got much good news over the past few weeks to excite consumers either.
Image Credit: REUTERS/Shannon Stapleton