Consumer Confidence Slipping

The preliminary reading of November’s University of Michigan Index of Consumer Sentiment was released this morning, and it declined for the second month in a row. The index fell to 66 (versus estimates for an increase to 71). After reaching 96.7 in January 2007, it fell sharply for the rest of that year and through most of 2008, before hitting bottom at 55.3 last November. The index is based on a survey, with two underlying components – Current Economic Conditions and Consumer Expectations, with Expectations receiving about twice the weight.

There’s been a lot of discussion recently regarding the eventual withdrawal of some of the tremendous fiscal and monetary stimulus that’s been unleashed on the financial system. Consumers’ spirits have certainly been lifted over the past few quarters by some of those efforts, including the rebound in asset prices, tax cuts, the homebuyer’s tax credit, Cash for Clunkers, etc. But as the recovery continues and authorities eventually try to wean the economy off of some of these temporary supports, consumers’ reactions will be critical. So far, it’s not overly alarming that there have been back to back monthly setbacks. But if consumers react poorly as various stimulus measures wind down, it could be an important sign that the economy is still too fragile to grow on its own.