Friday, November 14, 2008

Confidence Is Never An Economy Problem

The press likes to talk a lot about consumer confidence as one of the important factors in the current financial crisis. Commentators are often saying if only we could restore consumer confidence then the economy would be better. They will often also say that once consumer confidence is restored people will start spending money again. Both statements are false.

Numerous economic, consumer and corporate measurements become available at various times and fall into one of three categories. Either, they are lagging, concurrent, or leading measurements of behavior and the economy. Most economic, consumer and corporate statistics are concurrent or lagging measurements. Very few are leading indicators of the economy or consumer behavior. There are three economic leading indicators. The percent change in the price of the overall stock market, the slope in the US Treasury interest rate yield curve, and the premium for corporate debt over matched maturity treasury bonds.

When consumers are spending because they and their neighbors have jobs, consumer confidence is high. When consumers stop buying or saving because of job layoffs, health issues, shortages, etc. their confidence is low. Confidence does not create spending. It is just the opposite. Spending creates consumer confidence. Psychologists know that doing happy things makes people happy and not the reverse.

Therefore, consumer confidence is a concurrent indicator. It is low because people are not doing things such as spending and working. If more people were working and spending, confidence would be higher.

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