South-Western College Publishing - Economics  
Just When Things Were Looking Good
Subject Consumer Confidence
Topic Employment, Unemployment, and Inflation
Key Words

Consumer Confidence, Job Creation, and Economic Growth

News Story

Consumption is the largest spending component in the National Income Accounts. It depends heavily on consumer expectations and consumer confidence in the economy. The latest report by the New York based Conference Board reported that the March Consumer Confidence Index fell to 88.3 from an upwardly revised reading in February of 88.5. Any drop in the index adds new worries of recession for the already struggling national economy.

The drop in consumer confidence cannot be separated from the lack of job creation by the economy. Even though some economic signs point to a growing economy, many consumers perceive the availability of jobs to be weak. "While consumers claimed that business conditions were more favorable in March than last month, they also claimed jobs were less readily available," said Lynn Franco, director of research at the Conference Board's Consumer Research Center. The number of consumers saying jobs were hard to get rose in March to 30 percent from 28.9 percent in February.

The Federal Reserve has explained the mismatch between a strong economic expansion and a lack of job growth by citing the increased productivity of the American worker as companies have been able to get more output from each worker. The Fed argues that payrolls should pick up soon, because job growth due to increased worker productivity is likely to slow.

The Fed's argument is validated somewhat by the most recent repot from the Institute for Supply Management. The most recent report indicated that the manufacturing sector had been growing for the last 10 months, while its employment index - measuring companies that are hiring - rose to its highest level since December 1987.

For consumers, the proof is in the pudding and they are likely to remain cautious until the predicted job growth becomes evident to them.

(Updated May, 2004)


Explain why the Fed expects job growth to begin to expand soon.

2. How large are consumer expenditures as a percent of gross domestic product? What's the connection between job growth perceptions and consumer spending?
3. Explain how a fall in consumer confidence translates into smaller spending multipliers.
Source Reuters, "Confidence in Economy Shows a Dip", New York Times Online, March 31, 2004. Eduardo Porter, "Estimates of Job Creation Versus the Facts", New York Times Online, April 2, 2004.

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