Economists may have declared the recession over as of June 2009, but high unemployment, rising gasoline prices and declining home prices have left consumers more pessimistic and uncertain than ever about the economy.
The Conference Board’s September consumer confidence index plunged to 48.5 (on a 100 point scale) to its lowest level since February 2010. It’s the third decline in the last four months — well below economists’ predictions of a 52.5 — reversing Augusts’ gain of 53.2. The confidence level remains above the all-time low of 25.3 seen at the worst point in the recession in February 2009, but well below the long-run average of 94. A healthy index reading is considered to be 90 or above — something that hasn’t happened since the recession began in 2007.
Experts say the data raises concerns about the sustainability of consumer spending and the broader recovery. “Certainly, it makes acceleration in spending growth less likely,” said Scott Hoyt, senior director of economics at Moody’s. “We do not expect a double-dip recession, although risks remain high.”
September’s reversal resulted from less favorable business and labor market conditions coupled with a heightened pessimistic short-term outlook. “Overall, consumers’ confidence in the state of the economy remains quite grim,” said Lynn Franco, director of the Conference Board’s Consumer Research Center. “With so few expecting conditions to improve in the near term, the pace of economic growth is not likely to pick up in the coming months.”
Heightened uncertainty over taxes, health care reform, financial reform, employment and housing — different from past recessions — has made consumers and businesses extremely reluctant to spend money. The highly polarized political landscape ahead of the midterm elections is also reflective of downbeat consumer confidence. Economic uncertainty was a significant challenge for approximately 73 percent of small businesses, said Larry Nannis, chair of the National Small Business Association.
The biggest declines from the survey came from the assessment of current and prospective business conditions as well as labor market conditions. Consumers who said current business conditions are “bad” increased to 46.1 percent from 42.3 percent, while those claiming business conditions are “good” declined to 8.1 percent from 8.4 percent. Consumers who claimed jobs are “hard to get” rose to 46.1 percent from 45.5 percent, while those stating jobs are “plentiful” decreased to 3.8 percent from 4.0 percent.
Consumer confidence is an important economic indicator because it helps determine spending, which accounts for 70 percent of U.S. economic growth and is critical for a strong recovery. “Although consumer confidence remains at recession levels, what people say they will do and what they actually do are often times not one in the same,” said Jack Kleinhenz, National Retail Federation chief economist. “Certainly low confidence levels translate into slower consumer spending.” Americans aren’t accustomed to slow growth and income, so it’s natural to get this kind of reaction from consumers across the board,” he said.
But spending hasn’t completely dried up; consumers will continue to save — or look for bargains. Conscious of tight budgets, consumers are spending on mid-priced discretionary non-food categories which includes house wares, lawn and garden, domestics, apparel, and jewelry, said Richard Galanti, chief financial officer with Costco, the largest U.S. warehouse club. “People are staying home and doing things around the home,” Galanti said. “People have frugality fatigue.”
Experts say there is a long road ahead until the economy sees a strong recovery. Hoyt expects to see a similar scenario of what occurred in the 1990s — a period of low confidence but growing spending — play out into next year.
