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.