Blogs & Comment

The silver lining in poor consumer confidence surveys

Recognition of a problem is the first step in finding a solution.

(Photo: Michael Heinsen)

You can almost smell it: consumers across the western world are afraid. Following the U.S. debt-ceiling debacle, Americans exceedingly are skittish. Europe’s worsening sovereign debt crisis continues to rattle the continent’s residents. Canadians are watching nervously from the sidelines. Nobody’s in quite the right mood to head to the mall—and they’re cautious when they do.

Consumer confidence seeks to measure how consumers feel about the economy and their own financial situation. The more confident they feel, the likelier they are to make big purchases. If they’re fretful, though, they may seek to lower spending, which could depress the economy. And corporations may notice their malaise and cut back production in anticipation of lower sales, which reduces employment.

Consumer sentiments are notoriously volatile, and consumers always seem to be the last to figure out how good or bad things truly are. If the most recent batch of confidence surveys are any indication, consumers have just figured out the global economy may be headed for recession. Here’s a snapshot:

United States: The Conference Board’s monthly confidence survey found Americans suddenly fearful in August. Its index dropped to 44.5 that month, down from 59.2 the previous month. (The index is calibrated so that 100 represents the level in 1985.) This is the worst showing in two years, and not far off the abysmal sentiment that prevailed in April 2009. Conference Board officials speculated the drop may be a consequence of the debt-ceiling debate and the subsequent downgrade of America’s credit rating by Standard & Poor’s. And of course, the stagnant job market continues to rankle. Outside observers suggested a great many Americans believe another recession is imminent.

United Kingdom: Gfk NOP’s consumer survey reveals the British are in a similar funk. Its index hit -31 in August, again evidently because consumers there expect a recession. That’s 13 points lower than a year earlier. This abysmal level has been seen only twice previously: in early 1990 and during the 2008-09 financial crisis. “On both occasions, the decline in consumer confidence mirrored a slide into recession,” Gfk noted.

Canada: The Conference Board of Canada’s Index of Consumer Confidence shows that Canadians, too, are perturbed. In August it dropped 6.6 points to 74.7 (in 2002 it stood at 100). That’s the lowest level since July 2009. “Negativity toward future job creation and making a major purchase was the primary cause of the waning consumer confidence,” the organization reported. Elsewhere, the Conference Board has elaborated that Canadian households have trimmed spending this year, in part because they’ve been stung by high food and energy prices and fears of higher interest rates. TNS Canada, which also tracks consumer confidence, suggests falling stock markets may also be contributing.

All this pessimism augurs very badly for the global economy, of course. That’s because consumer spending is a critical driver of any developed economy. (The U.S. is the extreme example: around 70% of its GDP is attributed to shoppers.) Not surprisingly, many commentators bemoaned these results. “These are bad numbers,” observed Bart van Ark, the Conference Board’s chief economist, of the recent U.S. results. TD economist Chris Jones ominously noted: “The last time such a large drop in consumer expectations occurred was in the immediate aftermath of the Lehman Brothers bankruptcy.”

But there is a silver lining here, and it should not escape our notice.

By now, it should be abundantly apparent that the driving forces behind our last recession remain largely unresolved. One of them is broken household finances. Across the developed world, consumers have taken on far too much debt. In Canada, household debt has reached an average that’s approaching 150% of disposable income, a record high. The Americans and British peaked several years ago and are struggling to pay it down, but the lesson there is that consumer deleveraging takes many years. It took a long time to reach this desperate hour, and it will take a long time to correct it.

This fact is highly inconvenient for policymakers, who are themselves trying to reduce government spending. Because consumers are such a crucial driver of GDP, governments the world over have spent the last several years trying to coax consumers to open their wallets to fuel economic growth. The primary method has been to keep interest rates at rock-bottom rates. For one thing, his punishes savers by giving them anemic returns on fixed income products. For another, it makes borrowing tantalizingly cheap, which encourages spending on houses, cars and much else besides.

The problem, of course, is that continued spending would be folly for a great many consumers. Policymakers are pursuing short-term gain for long-term pain. If consumers obeyed policymakers slavishly, any resulting economic growth could not long endure, and the subsequent turmoil would be worse. Today’s abysmal confidence statistics suggest that consumers are beginning to understand this—and they’re not taking the bait.

For reasons we’ve addressed previously, falling confidence is no guarantee that consumers will suddenly become austere. It is, however, a necessary ingredient. Recognition of a problem is the first step in finding a solution.