South-Western College Publishing - Economics  
Consumer Spending Falls as American Consumers Become Pessimistic About Economy
Topic National Income Accounts
Key Words Consumption Spending, Expectations, and Economic Activity
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Reference ID: A150526812

News Story Economists, investors, and financial analysts watch personal consumption spending closely, since personal spending is the largest single component of U.S. economic activity. Consumer spending is the primary driver of growth in the U.S. economy, as it comprises over 67% of total spending. The Conference Board, a New York based for-profit business advisory service, notes that American consumer confidence fell sharply in August to its lowest level since last November.

The Conference Board's latest measurement showed a drop in the index from a reading of 107.0 in July to only 99.6 in August--the steepest single-month decline since the reading taken after Hurricane Katrina a year ago. Consumer confidence is a powerful determinant of consumption spending. The less confident consumers are, the lower consumption is likely to be for any given level of GDP. This most recent finding of a steep decrease in confidence suggests that consumers are likely to reduce spending in the near future, resulting in less economic activity in general. "Consumer confidence lost significant ground in August and is now at its lowest level this year," says Lynn Franco, Director of The Conference Board Consumer Research Center. "Less favorable business conditions coupled with a less favorable job scenario have resulted in the largest one month decline in confidence since Hurricane Katrina last year. Looking ahead, the glass remains half empty as consumers are growing increasingly more pessimistic about the short-term outlook."

Survey participants answering that conditions are "good" fell to 26.1 percent in August, from 27.3 percent in July. Those who said they believed conditions were "bad" increased to 16.7 percent, from 15 percent last month. And finally, respondents expecting business conditions to worsen increased to 12.9 percent, from 10.9 percent. The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS, the world's largest custom research company. The cutoff date for the preliminary results was August 22nd. The report will be revised as additional responses are received.

Questions
Discussion Questions:
1. Visit the Conference Boards site at http://www.conference-board.org/economics/ConsumerConfidence.cfm and report on their outlook for the labor market.
2. Aside from consumption, identify and discuss the other main components of GDP?
Multiple Choice/True False Questions:
1. Consumption spending in the U.S. is about the same size as business investment.
  1. True
  2. False
2. The Consumer Confidence Survey is useful in identifying shifts in consumption spending patterns.
  1. True
  2. False
Source Jeremy Peters, "U.S. Consumer Confidence Fell in August", The New York Times Online, August 30, 2006.
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