Has the Link Between Consumer Confidence and Consumer Spending Been Broken?
The latest Reuters/University of Michigan Surveys of Consumers came out this morning, and it reported continued improvement in consumer sentiment. The Survey's preliminary index for September rose to 70.2, up from 65.7 in August. The 70.2 reading was the highest since June, and roughly on par with the September 2008 reading, before the financial crisis hit and the bottom fell out of retail sales.
Within the survey, the Current Economic Conditions Index rose to 71.8 from 66.6 in August, and the Index of Consumer Expectations increased to 69.2 from 65.0. Further, the survey reported, the 12-month outlook index rose to 79 from 69 in August, the highest level since September 2007.
All of this is good news, and the anecdotal evidence suggests that sales in early September may have rebounded slightly, but consumer spending remains anemic and customers remain very reluctant to part with their dollars. This raises a question that on one hand is somewhat theoretical at this point, but on the hand has some pretty significant real-world implications.
Has the link between consumer confidence and actual consumer spending been broken? Can we really assume that continued improvement in consumer confidence will necessarily translate into a rebound in consumer spending? Are these metrics of consumer confidence and future expectations still meaningful as a leading indicator of future consumer spending?
This is another way of asking the question that many retailers have been asking for a while now; have consumer spending patterns been (permanently?) altered by this recession? It's hard from this vantage point to think that those spending patterns will return to what they were over the next three to five years. It appears that unemployment will remain stuck at elevated levels for some time, as businesses drive earnings through productivity gains. Housing prices have begun to stabilize, but foreclosures are expected to continue at current levels for the next several years. Personal balance sheets remain seriously leveraged. There are a lot of economic headwinds that consumer spending will be dealing with for the foreseeable future.
This suggests that improvements in consumer sentiment can't be assumed to necessarily translate into renewed consumer spending down the road. Business will still be challenging for most independent retailers going forward, and every sale will have to be earned, one customer at a time.