With news that personal spending has achieved its largest monthly gain in 19 months, many on Wall Street apparently say that actual spending reflected in the Commerce Department’s July report carries more weight than recent low readings for consumer confidence. Stocks surged by more than 2% Monday partly on news of the welcome increase in consumption by 0.8%; spending had declined by 0.1% the previous month.
In contrast, data released just Friday showed consumer confidence fell to its lowest level since November 2008. That finding, based on the Thomson Reuters/University of Michigan consumer sentiment index, matched a similar “consumer comfort index” published by Bloomberg that only recently approached striking distance of the 26-year-old index’s all-time low in January 2009.
So, what matters more: consumers’ actual spending or an intangible general mood based on survey data?
Prominent academic economists are among those who view confidence as the key driver of the economy. Yale professor Robert Shiller, speaking at a conference earlier this year, was emphatic in stating that “confidence drives the economy.” He expanded on that view in Monday’s New Republic, interpreting John Maynard Keynes’ view that a general mood of confidence was of greater weight than objective facts or information. “If we think confidence is returning, then confidence will return,” Shiller writes. He advocates boosting taxes and government spending, but in tandem, so that the national debt would not increase.
Meanwhile, historian and Harvard Business School professor Niall Ferguson, a noted critic of Keynes, has also stressed the primacy of confidence, writing that today’s policy choice is not between stimulus and austerity but “between policies that boost private-sector confidence and those that kill it.”
While Wall Street is betting on spending data now, the wild swings between jubilation and apocalypse in recent weeks may themselves be intensifying today’s economic anxiety.
Monday’s Wall Street Journal reports the Michigan Consumer Sentiment Index shows variance between families earning more than $75,000 and less than that amount. Confidence among higher-earning families–those most likely to invest in stocks–fell notably harder than lower-earning families.
Given the revised GDP figures released Friday, and the lower growth prospects they may portend, it is not hard to envision lower corporate profit reports in the weeks ahead and renewed downward plunges.