Almost alone among economic indicators, consumer confidence has plunged during the government shutdown and as the possibility of a default nears.
The economic confidence index updated daily by Gallup has fallen steadily since the summer and dramatically since the shutdown began two weeks ago. This week, it registered its lowest reading -- negative 41 -- since the debt ceiling standoff of 2011, suggesting that Americans expect conditions to rapidly worsen.
No other major economic indicators have fallen so dramatically.
Yields on 10-year U.S. Treasuries remain at 2.7 percent, below where they were in August, despite the threat of a default. The Dow Jones industrial average had risen for three straight days before falling 133 points Tuesday. The U.S. dollar has risen against a basket of currencies following the shutdown.
Yet the consumer confidence index is a different story, raising the possibility that it is out of sync with underlying sentiment — or, more ominously, that other economic indicators haven't caught up yet.
Eric Sims, a University of Notre Dame economics professor who has studied movements in consumer confidence, said that there are "pretty tight links" between survey responses and subsequent consumer spending patterns. "What they say is what they do," he said, adding that the drop in confidence has been "troubling."
In part, consumer confidence reflects Americans’ reactions to ongoing economic trends. But there’s another component that reflects consumers’ uncertainty over news, according to Marta Lachowska.
In a study of daily Gallup polling in 2008 released this year by the W.E. Upjohn Institute, Lachowska, found that movements in daily confidence indices, independent of other economic indicators, lead to "very short fluctuations in consumer spending." That's because consumers are risk averse, Lachowska told the Washington Examiner, and they tighten their budgets in reaction to bad news.
But the effect of a shock to consumers’ confidence that is separate from other economic developments is very short-lived, Lachowska found – it “lasts for a few weeks, then fades.”
The 2011 debt ceiling standoff is not included in Lachowska's data. But in that episode, plunging consumer confidence did not noticeably detract from consumer spending or derail the economic recovery. In 2011, the economic threat -- government default -- was eliminated overnight when lawmakers reached a deal to raise the debt. Consumer confidence began improving immediately afterward.
There is no way to tell why consumer spending didn't fall after confidence did in 2011, said Sims, noting that "it's always difficult to construct a counterfactual" of what would have happened in July 2011 if confidence hadn't plunged. Too many possible "countervailing" factors might have kept consumers spending despite consumers' fears.
Nothing in the data, Sims suggested, could give an indication of whether similar factors would counteract declining consumer confidence this time either.
Other indices beside Gallup's have shown falling consumer confidence in recent weeks. A Thomson Reuters/University of Michigan survey released Friday showed its lowest reading in nine months.
This article updated on October 16th to include comments from Lachowska.