The U.S. consumer is in a foul mood, and the effects on investors and the economy are likely to be harsh.
The Conference Board said on Oct. 28 that its consumer confidence index has dropped to an all-time low, from 61.4 in September to 38 in October. Americans were partly reacting to what they saw on the news in the past month: A plunge in the stock market, the dysfunctional credit markets, the failure of major financial firms, passage of a $700-billion bailout package in Washington, and a Presidential campaign focused on the economic crisis.
But consumers' fears aren't entirely a media creation (BusinessWeek.com, 10/28/08), economists say. Consumers are starting to feel the economic squeeze where they live.
Keith Hembre, chief economist at FAF Advisors, identifies three main culprits "conspiring to substantially depress household confidence": deteriorating asset markets, credit markets, and labor markets.
Asset market problems would include the quarterly retirement plan statements that showed a big drop in many people's net worth from declining investment—on top of the increasingly apparent impact of falling home values. Credit problems mean consumers can't borrow as easily to make purchases, from washing machines to houses. And the deteriorating job market is a result of falling profits in a variety of sectors, not just the financial industry. "With good reason, they're concerned about their jobs and the value of their homes and 401(k)s," says Stuart Hoffman, chief economist at PNC Financial Services (PNC).
The impact on the economy from this crisis of confidence may be even more doom and gloom. "When people believe there will be a recession, there will be a recession," says Jerry Webman, chief economist for OppenheimerFunds (OPY).
Americans can be expected to cut back on spending and to augment their savings accounts for tough times ahead. But that saving, however virtuous, will rob the rest of the economy of important revenue. That's a phenomenon economist John Maynard Keynes called the "paradox of thrift."
For almost two decades, Americans, known as the world's shopaholics, have spent freely. Consumer spending has increased steadily for 17 years ever since a mild decline in the last quarter of 1991.
But because of declining confidence and other factors such as the tough job market, many economists say they expect consumer spending to fall by 3% or more in the third quarter of 2008. That would be the worst drop in consumption since 1981.