Consumer Confidence Declines For Second Straight Month: What's Behind the Drop?

Consumer confidence has taken a hit for the second consecutive month, with both the University of Michigan's Consumer Sentiment Index (UMCSI) and the Conference Board's Consumer Confidence Index (CCI) reporting declines. The UMCSI fell to 86.5 in July from 92.4 in June, while the CCI dropped to 121.1 in July from 128.9 in June. This decline in consumer confidence raises concerns about the potential impact on consumer spending and economic growth. But what's behind this recent drop in consumer confidence?

One primary factor driving the decline in consumer confidence is inflation. The University of Michigan's survey includes a question about buying large household durable goods, which is heavily influenced by inflation. As inflation has picked up in recent months, the UMCSI has fallen, even though the labor market remains strong. In contrast, the Conference Board's survey does not have such an explicit question on inflation, making it less influenced by current inflation trends. This difference in methodology has contributed to the gap between the two measures of consumer sentiment since 2021.

Another factor contributing to the decline in consumer confidence is the lingering uncertainty surrounding the COVID-19 pandemic. The pandemic has been a once-in-century health crisis, and its ongoing impact continues to weigh on people's minds. The emergence of deadly variants throughout 2020 and 2021 has also contributed to "recency bias," keeping consumers wary even when economic fundamentals improved. Additionally, the widespread use of the internet and social media has led to faster and more widespread dissemination of negative news, which can distort people's perceptions of the economy. This negativity can persist even when economic fundamentals seem solid.

The decline in consumer confidence may have implications for consumer spending and economic growth in the near term. When consumers are less confident about their financial prospects, they tend to reduce spending on discretionary items such as vacations, luxuries, or high-ticket purchases like cars and houses. This can lead to a decrease in demand for these goods and services, which may result in lower production and inventory levels by businesses. Additionally, consumers may become more cautious about their financial future and save more of their income, leading to less money being spent on goods and services and potentially slowing down economic growth.

In conclusion, the recent decline in consumer confidence is a cause for concern, as it may have implications for consumer spending and economic growth in the near term. However, it is essential to consider a multitude of data and not rely solely on consumer sentiment indicators to gain a more accurate understanding of the economic outlook. By examining the factors behind the decline in consumer confidence and considering the broader economic context, investors and policymakers can make more informed decisions about the future of the economy.