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Consumer Confidence Crisis
Subject Consumer Confidence
Topic National Income Accounts
Key Words Consumption Spending, National Income Accounts, Economic Activity, Recovery, and Recession
News Story

The consumer confidence level is watched carefully by economist and investors because it is the largest single component of all economic activity in the United States. Consumer spending has been a growth element in the otherwise sluggish economy, making this announcement something of a surprise.

In April, as the war ended, consumer confidence surged and some economic indicators improved. May and June registered steady consumer confidence. The surprising decline for July was the largest since February when the nation was preparing for war with Iraq.

Nevertheless, as The Consumer Confidence Index falls, big ticket consumer spending seems to be holding up well and retail sales have been greater than expected. Noting, that plans to purchase automobiles, homes and major appliances have increased solidly, Mark Vitner, of Wachovia, says the critical question is, "…whether consumers were looking backward on unemployment or were they looking forward and telling us that unemployment is going to climb further."

Economist are generally surprised by the report but did not expect actual consumer spending to fall unless the near future brings further reports on increasing unemployment. As stated by Oscar Gonzales, an economist with John Hancock Financial Services, Inc., "This doesn't mean a sudden decline in consumer spending."

The Conference Board's indexes are based on a survey of 5,000 households that participate in a consumer research panel. The latest report is from about 2,500 responses that had been received by July 22. The report will be revised as additional responses are received.


(Updated August 27, 2003)

Questions
1.

How large are consumer expenditures as a percent of all economic activity?

2. Why would the stock market be concerned with falling consumer confidence?
3. Why would economist be saying, "this doesn't mean a sudden decline in consumer spending"?
Source Associated Press, "Consumer Confidence Suffers Surprise Drop," The New York Times on Line, July 29, 2003.

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