What Falling Consumer Confidence Means for Your Wallet
Consumer confidence has plummeted in recent months, with expectations for the future of the economy reaching a 12-year low. But as headlines warn of a possible recession and uncertain times ahead, it’s only natural to feel frustrated. What does it all mean? And what can we do to prepare?
Let’s look at what consumer confidence is and what you should do if the headlines and the consumer confidence report have you concerned.
What Is Consumer Confidence?
When the stock market tumbles and unemployment rises, consumers worry. But consumer confidence is measured through surveys gauging public sentiment on issues like the current job market, income potential and the overall health of the U.S. economy.
The results are used to create a couple of economic indexes that help policymakers and the public determine how things are going. Those indexes include:
“Higher consumer confidence indicates people are comfortable with their ability to cover expenses and earn more money,” said Marc Guberti, expert contributor for Annuity.org and Certified Personal Finance Counselor. “Policymakers can adjust their policies aimed at minimizing extra costs if consumer confidence drops to make people feel better about their ability to cover expenses.”
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Consumer Perception vs. Reality
Feelings aren’t facts. Consumer confidence surveys reflect public mood, but they can’t predict the future. Still, they often align with key economic indicators like:
- Retail sales
- Hiring trends
- Housing activity
- Stock market movement
Headlines can also drive consumer behaviors. They create what Robert R. Johnson, PhD, CFA, CAIA and professor of finance at Heider College of Business, Creighton University, describes as a self-fulfilling prophecy.
“The current headlines are dominated by prospects of a coming recession, and even the perception of lower wealth can lead consumers to spend less than they would if they believed economic prosperity was on the horizon,” he explains. “This can be a self-fulfilling prophecy. That is, consumers can dial back spending so much that they can cause a recession.”
What Happens When Confidence Falls?
As past consumer confidence dips have shown, they can directly impact the economy. Here are a few ways.
Lower Spending
When consumer confidence is low, people may pull back on their spending, behaving conservatively to offset any tough times that might be coming. This can especially apply to big-ticket purchases like vehicles, furniture or electronics. They may also hold off on travel until the tough times are past.
“One of the strongest factors in consumer spending is what economists term the ‘wealth effect,’” Johnson said. “The wealth effect is the change in spending that accompanies a change in either real or perceived wealth. That is, when consumers feel wealthier, they tend to spend more than when they feel less wealthy.”
Reduced Business Investment
Businesses might see low confidence as a sign of turbulent times and pull back on spending. They might slow hiring and even reduce staffing. Expansion plans could be put on hold, along with other budget cuts. Overall, these cutbacks can impact the economy.
Market Volatility
The recent ups and downs of the stock market are nothing new. Consumer confidence can impact investor activity. Investors may quickly sell off certain stocks or pull back on investing altogether. This can negatively impact the stock market.
“Selling stocks of reliable companies and ETFs at their lows is a major mistake,” Guberti adds. “We all navigated tariffs during Trump’s first term, and the stock market performed poorly in 2018. However, stocks rebounded sharply in 2019 and are well above their 2018 levels.”
Policy Changes
In response to shifts in consumer confidence, policymakers may make changes that impact the economy. The Federal Reserve may raise or lower interest rates or political leaders may offer a stimulus package to encourage consumer spending.
4 Things You Can Do When Consumer Confidence Dips
The headlines can leave you wondering what you can do to weather the storm. But this can be a great time to look at your finances. Here are some steps to get you started.
1. Build an Emergency Fund
If you don’t have one already and can swing the extra expense, building an emergency fund can give you some control. While interest rates are high, setting the money aside in a high-yield savings account or short-term CD could also help you earn some money on the funds.
“This fund will give consumers peace of mind (financially) no matter what is happening in the outside world or in their personal lives,” said Kelly Renner, owner and Certified Financial Planner Professional at Life Strategies Financial Partners.
2. Don’t Panic
One of the biggest mistakes a consumer can make is to start selling off stocks and exchange-traded funds (ETFs) when their value sinks. Guberti has found that hanging onto those stocks is the best move, because stocks tend to rebound in the years immediately following a dip.
“You should only invest money in the stock market that you’re OK with not touching for the next 5 to 10 years,” Guberti urges. “If you make any financial move out of panic, it’s likely to be a bad one.”
3. Set Permanent Habits
This can be a great time to examine your budget. You don’t have to make any extra moves while confidence is low, Guberti said, but having a clear picture of your income, expenses and savings can help you move forward with confidence.
“It’s good to review your budget, see which expenses to remove and look for ways to boost your income,” Guberti advises. “You should be doing these things regardless of whether consumer confidence is high or low.”
4. Focus on the Big Picture
It can be easy to buy into the headlines and let them shape your reality. But the truth is, national headlines may not reflect what’s happening in your community. Even if the local economy is struggling, you may be able to coast through the turbulence unharmed.
“This is a time of great turmoil for some people,” Johnson said. “For instance, many people working for the government have lost their jobs and their future is uncertain. Consumer confidence for these people is, and should be, very low. I don’t want to minimize their sufferings. But, for most of Americans, the unemployment rate is low (well below historical averages) and inflation has appeared to stabilize.”The consumer confidence index can be a measure of the economy. However, it isn’t the whole picture. Although declining confidence can signal economic slowdowns, it’s no guarantee. The best thing you can do is keep an eye out but also make thoughtful decisions for your financial future rather than reacting to every blip on the radar.
Stephanie Faris is a professional finance writer with more than a decade of experience. Her work has been featured on a variety of top finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.
