If You're Happy And You Know It, Clench Your Wallet

Most people tend to associate consumer confidence with spending. Some data out of the Pew Research Center seems to suggest the correlation might not be as strong as some think. They've found that, while economic outlook is improving, spending hasn't.Here are two charts that Pew includes in their report:

On one hand, the first chart seems like good news. People are more optimistic than in February. But I'd say that they're still pretty pessimistic overall -- the other side of the coin says 52% of people think that the economy won't be better a year from now. That's a pretty staggering percentage of people who think things will be as bad or worse in June 2010. The real surprise, however, results form comparing the two charts. Since February, when 8% of respondents thought economic outlook was worse, just as many people are cutting back on vacations and fewer are now eating out. Home buying has improved, but I would argue that government incentives and incredibly low interest rates in the market probably drive this variable more than consumer confidence. The overall spending cutback statistic also seems to have improved slightly, by 3%. But this is still less than the 8% increase in optimism about the economy. So what gives? I think this shows why consumer confidence is kind of a useless statistic in a vacuum. Unemployment has been steadily increasing since February. And no matter how confident you are about the future, if you lost your job, or fear losing your job in the next few months, then chances are, you're cutting back spending. Another chart Pew includes indicates that it's probably increased unemployment that cancels out the increase in optimism:

Even though fear about the future still dominates, it's gone down the same amount that actual financial trouble has gone up. That's how I would explain the public's reluctance to spend again, despite greater optimism.

This article available online at:

http://www.theatlantic.com/business/archive/2009/06/if-youre-happy-and-you-know-it-clench-your-wallet/19854/