Consumer confidence in the US was hit hard during the recession, with the University of Michigan’s index of consumer sentiment plunging to 55.3 in November 2008 (from 96.9 at the start of 2007). Since then, however, confidence has been on a broadly upward trend, despite several significant negative shocks.
The effect of these shocks, which have stemmed largely from government policy, has certainly been damaging in the short term, but experience suggests that such drops do not persist. We do not expect the recent government shutdown to be an exception; although the shutdown weighed on consumer confidence in October and November, we expect it to resume its upward trend.
Downward volatility around an upward trend
Several factors have been behind the upward trend in confidence. An improved labor market has been critical, as the unemployment rate fell to 7.3% in October from a peak of 10.0% in October 2009. A recovery in asset prices has also helped. The housing market was hit hard after the bubble burst, but it took until this past year for steady y/y gains in home prices to emerge.
Equity markets have also more than doubled from their 2009 lows, benefiting from greatly reduced volatility. As we have noted before (see Wealth surge lifts consumption and revenues, 10 May 2013), the wealth effects resulting from higher real estate and financial asset prices have been a tailwind for consumer spending.
However, the upward trend of recent years has not been consistent, and there have been several significant negative shocks. The first occurred in the summer of 2011, when the debt ceiling was not raised long before the deadline and the rating of US debt was downgraded. At the end of 2012, there was also a large drop as the economy sped toward the tax increases and spending cuts built into the “fiscal cliff.”
Policymakers managed to avoid the most severe consequences of each of these manufactured crises, but both had a significant impact on consumer perceptions of government policy. In August 2011, for example, only 5% of respondents thought the government’s economic policy was doing a good job and an all-time high of 57% thought that the policies were doing a poor job.
The November 2013 survey showed that just 9% of respondents viewed government economic policies in a favorable light, only modestly above the debt ceiling levels, yet the print of 72.0 for the overall index of consumer confidence was notably stronger than the August 2011 reading of 55.8. This suggests that a strongly negative view of government policies, should it persist, is not enough on its own to offset positive tailwinds from improved housing and equity prices and better labor markets.
Consumer and business priorities
Business confidence tends to follow a similar path to consumer confidence, yet although respondents in the NFIB independent business confidence survey reacted to the same policy shocks as consumers, they showed different priorities in the magnitude of their responses. Consumers responded much more negatively to the debt ceiling negotiations during the summer of 2011 than businesses did.
During that period, consumer confidence was barely above the levels seen during the depths of the most recent recession; business confidence also fell significantly, but the drop was smaller. On the other hand, the NFIB survey suggested that businesses were more concerned than consumers about the potential impact of the fiscal cliff. The NFIB index printed at 87.5 in November 2012, ahead of the fiscal cliff deadlines, a level close to the prints seen immediately after the recession.
We expect the negative consumer confidence shock that occurred as a result of the government shutdown to be short-lived, in line with historical evidence. In our view, positive underlying trends should ultimately prevail amid improving labor and housing markets. These factors should also spur business confidence. That said, negative policy shocks remain a distinct possibility: the federal government is set to bump up against the debt ceiling again early next year, and a potential drawn-out debate would join the list of self-induced crises that have weighed on confidence in the past few years.