Why Consumer Confidence won’t matter this time.

Historically the Economy has been rescued from the depths of recession on increases in consumer spending, ie. a consumer lead recovery. Makes sense right? Consumption accounts for 65-70% of GDP. Consumption begins to increase on the back of you, the consumer, feeling more confident that your job will be secure = a stable income.

In recessions of the past, an increase in consumer confidence meant that the consumer would go out and increase consumption. Increased consumption lead to increased production and ultimately a pickup in hiring. Economic perception became reality. In essence, we willed ourselves out of recession. However this time I believe will be different due to the missing spark that has been available in the past.

An increase in confidence won’t mean an opening of the wallet and increased consumption for 2 reasons.

First reason is home values. Home values continue to decrease, sapping all purchasing power that would have existed in the form of home equity, (A home is a person’s most important investment, right?).
And second is access to credit. In the past, consumers would increase consumption even in the face of a deteriorating job picture because as soon as confidence came back, they would simply tap into their credit cards or other form of loan to increase their consumption, thus giving us a consumption recovery and eventually feeding into the labor picture.

With these two important factors missing, we simply do not have the spark that will pull us out — Healthy, low levels of household debt needed for access to credit.

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