Is Consumer Confidence the Key to the Economic Recovery?

Key Takeaways:

• Consumer confidence (willingness to spend) may play a larger than normal role in today’s economic recovery.

• Consumer confidence is currently at a multi-year low due to the economic shutdown.

• Four factors (similarity to 2008 crisis, improvement in jobs, stock market gains, and healthcare advancements) may help consumer sentiment start improving.

With major cities reopening across the country, the path to a smooth economic recovery will likely depend on everyday Americans. This is because businesses, especially small and medium sized ones, will only recover from the nationwide shutdown if consumers begin to spend money in a responsible way. In turn, consumers will only spend if they feel comfortable returning to shops and malls, and if they feel confident in their own personal financial situations.

Consumer Confidence Is Low

Thus, in our interconnected economy, consumer confidence may play an outsized role in the path to recovery. After all, even if businesses open, economic activity won’t fully resume until workers and consumers feel safe. 

At the moment, consumer confidence, sometimes referred to as “consumer sentiment,” is at a multi-year low. The chart below highlights one particular consumer survey that measures how consumers feel. It shows that across various measures – including current conditions and the future – are all at their lowest levels since the middle of the last economic recovery. Many of these survey numbers fell swiftly alongside this year’s economic shutdown.

Chart: Consumer sentiment is at multi-year lows due to the economic shutdown. This is true across current conditions and expectations. However, consumer sentiment can recover as life slowly returns to normal.

Sources: Clearnomics, University of Michigan Consumer Surveys

Will Consumer Confidence Improve?

There are a few reasons to believe that consumer confidence can improve. 

First, consumers are likely to be weary after the sudden COVID-19 crisis changed everyday life in just a matter of months. With life upended, many consumers sheltered in place, which caused spending to plummet and savings rates (for those fortunate enough not to have lost their income) to skyrocket. Although there is still significant uncertainty, consumers might begin to open their wallets again as businesses reopen, people return to work, and life slowly returns to normal.

Some Similarity to 2008 Recession

This is exactly what happened after the 2008 recession, just over a much longer period of time due to the nature of that global financial crisis. As the economy slowly recovered and new jobs were created, consumers began to feel better about the economy and the future. Although it took time for this to happen, consumers did eventually feel better than they had since the late 1990’s.

Second, it’s not surprising that how consumers feel is highly dependent on the economy. While we’re not out of the woods yet, there are already signs that economic conditions are improving. Recent jobs numbers show that businesses that have been able to reopen – including restaurants and retailers – have been willing to re-hire workers.

Additionally, the stock market has staged a significant recovery, the value of homes has held steady, and many jobs are beginning to return. This will likely boost confidence in financial conditions and help consumers to feel more comfortable in making larger purchases.

Finally, scientific breakthroughs, advances in treatments, and the implementation of sensible policies could not just have a large public health impact but boost consumer confidence further. Although progress in these areas is still uncertain, especially when it comes to finding a vaccine for the novel coronavirus, measures can still be taken to balance public health and economic conditions.

We’re Heading in the Right Direction

Thus, there are good reasons to believe that, although this continues to be a challenging period, the U.S. economy can recover if consumers feel confident.