What is consumer confidence? Based on a random survey of consumers conducted by an independent organization, the goal is to measure what people think of their immediate economic prospects. It's an imprecise measure, but still useful in assessing the overall health of an economy.
As reported by Bloomberg:
The slide in confidence raises the risk that the slowdown in hiring revealed by last month’s jobs report will cause households to retrench, restraining the spending that accounts for about 70 percent of the economy. The weak labor market is overshadowing the benefit of the lowest gasoline prices in five months, one reason why companies like Ford Motor Co. (F) (F) are keeping an eye on attitudes.The same is happening to our friendly neighbors to the north. From the Canadian Press:
“The employment situation continues to weigh on consumer minds,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who correctly forecast the confidence index. “Usually consumers react to falling gasoline prices by increasing their spending, but this time around it looks like they’re a little bit cautious.”
Canadians are most gloomy about near-term job prospects and the health of their finances, according to the Conference Board's latest consumer confidence survey, released Tuesday.Maybe it's the evil confidence fairy at work again. But even putting aside that straw-person argument, the recent path of consumer confidence suggests some interesting updates to reigning economic models.
The consumer confidence reading for the month shows a fall of 6.8 points to 74, about where it stood in January.
It was much the same story south of the border where the Conference Board's U.S. index dropped for the fourth month in a row to 62 points, also the lowest level since the start of the year.
Economists often don't put a lot of stock in consumer confidence surveys, but Jennifer Lee, a senior economist with the Bank of Montreal, said there is reason to take these results to heart.
Canadians and Americans have been bombarded with daily reminders of the intractable nature of the European crisis and reports that businesses are holding back on investment and hiring, Lee said. In this backdrop, it is natural to assume households may also be reluctant to go out on a limb on purchasing decisions, which would further hurt the economy.
"I think there is reason for pessimism given that there is so much uncertainty out there," she said...
In simple Keynesian models of consumer behavior, the marginal propensity to consume (MPC) is assumed to be fixed - e.g. for every dollar I earn, $0.75 will be spent and $0.25 will be saved - or at the very least to be independent of other important macro-variables. It's this assumption which implies the so-called "multiplier" to government spending.
What if MPC is a function of other variables, such as consumer confidence or government spending? In other words, what if consumers spend less as government spends more, as predicted by the Barro-Ricardo equivalence theorem?
|Theory: propensity to consume declines with government spending.|
This throws a wrench in simple Keynesian economic models, and also helps to explain why we've had such a lackluster economic recovery, in spite of massive increases in federal spending over the last four years.
We could argue about the exact shape of the "MPC curve" (it could be either the blue, or the green line, or something else entirely) and the exact impact it will have on economic output. But it's pretty much undeniable that the fixed-MPC version of Keynesian models should be placed in the dustbin of history.