Investment Contrarians

Consumer Confidence Takes a Dramatic Hit; What This Means for Economic Growth in 2013

By for Investment Contrarians |

Consumer Confidence Takes a Dramatic HitWhen it comes to forecasting economic growth, one has to pay close attention to consumer confidence. For developed nations, domestic spending makes up a large portion of an economy. If consumer confidence becomes troubled, this will certainly impact economic growth going forward.

Recently released data from Thomson Reuters/University of Michigan and their consumer sentiment index shows a decrease to 74.5 for December, as opposed to an estimated reading of 82 from a survey conducted by Bloomberg. November’s reading for consumer confidence was 82.7. The decrease in consumer confidence was the weakest in four months. (Source: “Michigan Consumer Sentiment Declines More Than Forecast,” Bloomberg, December 7, 2012.)

While economic growth has been weak for most of 2012, spending by consumers was relatively strong. However, I believe the increased discussion regarding the fiscal cliff issue and the constant bickering and ineptitude of politicians in averting drastic changes to fiscal policy is now weighing down consumer confidence. This increased awareness of the potential for a massive decrease in economic growth in 2013 will certainly continue to weigh down consumer confidence.

While various parts of the economy are helping consumer confidence, including increasing home prices and some job growth, albeit still tepid, the implementation of the fiscal cliff will have an extraordinary impact on economic growth. I believe that for a long time, most Americans were unaware of how severe the situation might be in 2013. Now that more news organizations are making Americans cognizant of the dire circumstances, consumer confidence is being negatively impacted.

According to the National Retail Federation, the four-day Thanksgiving weekend generated $59.1 billion in sales, an increase of 13% from 2011 levels. While that’s a good number, last year’s Thanksgiving weekend generated an increase of 16% from the prior year. It appears that consumer confidence weakness is starting to seep into spending decisions, which could impact economic growth in 2012. (Source: “Michigan Consumer Sentiment Declines More Than Forecast,” Bloomberg, December 7, 2012.)

It’s never easy to build consumer confidence, especially when economic growth is weak. The politicians in Washington are making the situation much worse by continually dragging their feet and kicking the can down the road. Both citizens and businesses can deal with changes to an economy, but what is extremely frustrating is dealing with uncertainty. When the future tax and fiscal policies are unknown, it is extremely complicated to build a long-term strategy.

Economic growth can and will be impacted if consumer confidence continues to decline. I believe that if the politicians can think about the long-term future of the country for once, we can build certainty through permanent structural reforms that can be the foundation for long-term economic growth.

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