The question is: How important is consumer confidence on the well being of the American economy?
Consumer confidence- Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. (wikipedia)
Can anyone find any correlation between the consumer confidence index (CCI) and the Gross Domestic Product (GDP- sum of the value of all goods and services in a country).
In theory, how important is consumer confidence in the well being of the economy? In Practice?
Thank you for your opinions! I am conducting research to write a paper on major economic factors which determine the overall well-being of the economy (not for school though).
It seems to be surprisingly important. When consumers are not confident about the direction of the economy, they hold on to their money. This slows down the economy because businesses aren't making as much money, which causes them to scale back expansion plans, or cut existing operations, which costs jobs. Eventually, for a variety of possible reasons, people start spending again and the business cycle picks up.
Consumer confidence is the basis of the entire economy. Think about this for a second - if you were lost in the woods, and you had a $100 bill in your pocket, what would it be good for? Nothing, except to start a fire perhaps. Money is only worth what we believe it is worth.
When people believe that the economy is good, they invest. Consumers buy things, investors put their money into the stock market where it can be used to grow companies, or into a bank which can then make loans. Then, since people and companies are buying things, more things need to be made; since the banks are loaning, more houses and cars need to be built. This creates a demand for more workers, and that increases consumer confidence, and the cycle goes on, adn the economy grows.
If, on the other hand, people are afraid that they might lose their jobs or take a pay cut, they stop buying things and hang on to their money. Consumer demand then goes down, workers get laid off, and people really do lose jobs. It's a self- fulfilling prophecy.
Consumer confidence is important, but I think the constant reporting of unemployment and consumer confidence is actually hurting consumer confidence. If things seem bad, people will not feel confident. If people are always watching the fluctuations in the numbers, rather than the trends, consumer confidence becomes as much of a gamble as the stock market.
This is a very important thing. Consumer spending makes up something like two-thirds of the GDP of the United States. Therefore, consumer confidence has a huge impact on GDP. If consumers are too worried about the economy and are unwilling to buy like they normally do, aggregate demand goes down and so does GDP.