Saturday, October 18, 2008

A Crisis of Confidence for U.S., Canadian Economies

Canadian Press - Consumer Confidence Plummets As Signs of Economic Slump Deepen
Washington Post - Consumers' Mood Suffers Record Drop in October: Survey
Bloomberg - Canada Consumer Confidence Drops to 26-Year Low, Survey Says

Consumer confidence, a crucial measure of economic health and behavior, spiraled downward in October as consumers reacted to the subprime mortgage crisis and prepared for what is predicted to be a recession. The worst U.S. financial crisis since the Great Depression, according to some analysts, has taken its toll on consumer expectations, with the U.S. index dropping a record monthly amount and the Canadian index falling to its lowest level in 26 years.

The Reuters/University of Michigan survey of consumer confidence in the U.S. fell from 70 to 57 points in October, further than most experts expected. And in Canada, the index fell from 85 to 73 points, above U.S. confidence levels but increasingly pessimistic as the world's largest economy to its south appears to be headed toward a serious recession.

The consumer confidence surveys reflected citizens' beliefs that they had not yet seen the bottom of the economic crisis, as most believed they would be worse off in six months. Consumer confidence also reflects willingness to make big purchases, buy homes, and start businesses. Lack of confidence in the economy therefore determines consumer behavior that could play a large part in determining the severity and longevity of a potential U.S. recession. One analyst noted that the U.S. consumer has represented as much as 72 percent of the U.S. economy in recent years and that the effects of pessimistic consumer behavior and decreased household spending were likely to be profound.

Consumer confidence in Canada fell in all provinces, although the worst hit was Ontario, where confidence fell 16 points in October.

1. Are consumers always accurate predictors of macroeconomic trends? Wasn't one of the causes of the subprime mortgage crisis the irrational optimism of consumers that home prices would continue to rise indefinitely?
2. Did the U.S. financial stimulus package encourage increased consumer spending, or was it insufficient to alleviate consumers' fears about the potential for a recession?

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