Weakening Link Between Consumer Confidence/Sentiment and Spending

Milken Institute finds that consumers are spending despite poor outlook

Many believe that the decline in consumer confidence reported in August portends, with absolute certainty, a renewed drop in economic activity.

But in a new report, Ross DeVol, the Milken Institute's chief research officer, calls into question whether consumer confidence is still the most accurate predictor of real-world purchasing decisions.

What's more, DeVol finds, the decline in consumer confidence appears to be a sign of public disgust over political gridlock in Washington, not just a lack of confidence in the direction of the economy.

In "Consumer Sentiment and Spending: Watch What I Do, Not What I Say", DeVol found:
 Consumer sentiment as measured by the University of Michigan declined 12.6 percent in August, while The Conference Board's index of consumer confidence fell by 24.8 percent.
 Based on our econometric analysis, most of the drop in consumer confidence was attributable to the job approval rating of Congress, which plunged to 13 percent.
 Consumer confidence still helps explain consumer spending decisions, but the historical relationship between sentiment and action has weakened.
 July's 0.5 percent jump in real consumption expenditures and August's preliminary number for same-store retail sales indicate that consumption spending will rise at an annual rate of 2.5 to 3.0 percent in the third quarter's GDP report.

The report is here: http://bit.ly/nPQmfk

Fed chairman Ben Bernanke made a reference to this phenomenon at Jackson Hole but noted the lack of econometric evidence. Now that we've done the analysis, we hope you'll take a look. Since consumer spending is the underpinning of the U.S. economy, it's vital to understand the factors that are - and are not - driving purchasing decisions.

Jeff Monford
Interim Director of Communications
The Milken Institute
O 310-570-4623
M 718-809-3405
Please join us for the 13th Annual Milken Institute State of the State Conference, October 13, 2011, in Los Angeles. For details, go to http://milkeninstitute.org