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What’s Causing The Recent Consumer Confidence Decline?

Consumer Confidence Declines

According to recent data released by several different surveys, including the Consumer Confidence Index and Ipsos, consumer confidence has declined in December and November. What’s causing consumer confidence declines when, according to available data, the U.S. economy is in relatively good shape?

Consumer confidence is a rough measure of how comfortable Americans are feeling with the current state of the economy. Higher confidence usually means more robust spending, whereas lower confidence can precede a drawback on expenditures.

That’s why most economists generally equate a high consumer confidence level with a healthy economy.

What’s Causing Consumer Confidence Declines?

In early 2017, consumer confidence indexes started to track an interesting trend: a distinct partisan split in the way survey respondents viewed the economy. Democrats tended to be much more reticent in their enthusiasm, where Republicans typically had a higher degree of confidence. There’s little evidence that this partisanship has evaporated.

What’s more, there seems to be mounting evidence that political factors are contributing to declining consumer confidence overall, including:

  • The Longest Government Shutdown in U.S. History: To be sure, the most recent government shutdown is not what’s causing consumer confidence declines all on its own. These declines began in November and accelerated in December. However, long-lasting government shutdowns have rattled consumers in the past, and this looks to be no different, especially with no end in sight.
  • Brexit: Turmoil overseas can sometimes have an impact on domestic consumer confidence, and the uncertainty surrounding Great Britain’s departure from the EU is a strong example of that. This is especially true because the departure agreements between the May Government and EU officials have been roundly denied by the British parliament, making it difficult to see a way forward.
  • Tariffs: The trade war between the U.S. and China, while cooled somewhat, continues to have a lasting depressant effect on certain U.S. businesses.

More Than Politics

Between Brexit and the U.S. Government shutdown, the two most powerful democracies in the world are looking a little paralyzed. But that’s not the only issue causing declines in consumer confidence. Some analysts point to the turbulent performance of the stock market in recent days as one factor.

It’s true, the stock market is not the economy. But coverage of stocks losing ground (and retirement accounts dwindling as a result) can make consumers feel defensive and cautious. That’s precisely the kind of environment in which confidence begins to decay.

Additionally, wage growth is still somewhat flat. True, there have been some upturns over the past year, but not enough to mitigate the damage of wage stagnation since the Great Recession.

A Turnaround Ahead?

It’s difficult to say with certainty whether November and December’s decline in consumer confidence is a blip or a harbinger of things to come. But many of the challenges that may have contributed in some way to the drop in consumer confidence have continued, and there are no easy solutions in sight.

Political turmoil in the U.S. is likely to dominate news cycle after news cycle, creating the impression of an economic crisis even as the country maintains a relatively healthy economy. This will undoubtedly continue to erode consumer confidence unless consumers feel other benefits in very tangible ways. That is, if wages continue to increase, we may see a turnaround in these declining consumer confidence numbers.

Continued Monitoring of Consumer Confidence

Consumer confidence has long been seen as a barometer for the health of the U.S. economy. That economy is, after all, a service-based economy, and when consumers tighten their spending, the economy suffers.

Drops in consumer confidence, then, can create a kind of negative feedback cycle. Knowing what’s causing consumer confidence declines can help us contextualize that information in order to determine whether any root causes are related to the core health of the economy, or to other factors that might be creating a perceptual problem.

Then comes the hard work of finding a solution.

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