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Is the Consumer Losing Confidence?

Consumer confidence in the United States appears to be waning after a recent wave of optimism. According to a recent Reuters/University of Michigan Survey of Consumers, consumer sentiment fell from 73.5 in September to 69.4 in October. Further, the Survey’s economic outlook index also decreased, falling from73.5 in September to 67.6 in October.  

This 6% decrease in consumer sentiment and 8% drop in economic outlook caught many by surprise but stands to reason given the high levels of unemployment, unclear direction of national health care policy, threat of inflation and sustained losses in household net worth stemming from the downfall in the 2008/2009 markets. They often say during political races, that politics are local. This analogy can also apply to investing as it relates to consumer confidence. While investors may feel a degree of confidence that the outlook for the economy or stock market, as a whole, may be improving, they still may have doubts or skepticism given their own financial situation.  While investors remain concerned about their jobs or ability to recover from the real estate and investment losses that they suffered in 2008, their “local” personal confidence level may be weak.

Consumer confidence is often closely associated with consumer spending and a drop in one of the indicators often leads to a drop in the other indicator. Low levels of consumer confidence have led to depressing forecasts for consumer spending. For example, Nigel Gault, Chief U.S. Economist at HIS Global Insight, predicts that consumer spending will only rise 1.5% in 2010 and will end 2009 with a 0.7% annual decline.  

If these forecasted levels of consumer spending hold true, corporate earnings will certainly be impacted.

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