Consumer Confidence Drop Could Spell Trouble for Incumbents

Fatigued by sustained unemployment and government gridlock, are Americans giving up?

By + More

The recession is over, jobs are slowly coming back, and third-quarter GDP is expected to climb. Yet one indicator suggests that consumer confidence still sank sharply and unexpectedly this month. While the impetus is unclear, the result could be not only more economic pain, but political troubles for incumbents in Washington.

According to the Conference Board, a nonprofit business membership and research association, consumer confidence tumbled 6.6 points from September to October, to 39.8 (on a 100-point scale, with 100 equaling 1985). This reading defied expectations; economists had predicted the October index would remain flat. However, the dip in consumer confidence is particularly troubling because it is at its lowest point since March 2009, when the economy was still in recession. For President Obama, and perhaps any incumbent, this latest figure should be particularly distressing. It shows that, even with an economy showing signs of renewed vigor, the American public is growing pessimistic, which can easily translate into anti-incumbent fervor come Election Day.

[See how the Obama administration is trying to help homeowners.]

The Conference Board's consumer confidence figure is now slightly lower than it was in August, when lawmakers wrangled over raising the debt ceiling, resulting in ratings agency Standard & Poor's downgrading the U.S. credit rating. That month, the index dropped from 59.2 to 44.5. This month, however, no event appears to have precipitated worsening sentiments. Rather, consumers appear to have lost their optimism; while the measure of future expectations rose by 1.6 points in September, it fell by 6.4 points this month.

At the core, the apparent decrease in consumer confidence shows that sustained high unemployment may have finally caused Americans to lose hope, says Ken Goldstein, economist at the Conference Board. "It's not as if job growth [and] wage growth have dropped significantly. The change is really about up some hope that things are going to get better," he says.

Contributing to that malaise is a pervasive sense that government is unwilling or unable to provide any assistance. "The sideshow in July and August about getting the debt ceiling down shook people's confidence that people in Washington even know what they're doing," says John Cannally, economic strategist at LPL Financial, a Boston-based financial services firm. The president's big push for his American Jobs Act, and its subsequent drawn-out failure, as Congress appears ready to reject it piece by piece, could easily worsen this sentiment.

That spells trouble for incumbents, particularly the president. Some studies have shown a positive correlation between consumer confidence and presidential approval ratings, as well as with other measures of political sentiment, like whether the country is moving in the right direction. Discontent with Washington and the economy drove the 2008 and 2010 "wave" elections and could easily do so again.

The president's latest executive actions to boost the economy—revamping HARP, a refinancing program for troubled homeowners, and a push for helping student loan borrowers to be announced tomorrow—appear to be as much about proving that the White House cares about the economy as boosting growth itself. Reinstating hope in the future, particularly as the election gets closer, could go a long way toward boosting consumer confidence and thus, perhaps, confidence in the president himself.

[See how the recession is affecting young adults in the U.S.]

Consumer confidence is, by nature, a complicated indicator—an attempt to objectively measure a subjective condition. In fact, there is a fundamental disconnect between objective measures of the economy and public perception, says Canally. "All of [the leading consumer confidence indicators]—Rasmussen, [University of] Michigan, Conference Board—are all at 30-year lows," despite an economy that is showing a few signs of strength again, he says, and according to his analysis, "The gap between what consumers are feeling, seeing, and hearing has never been wider."