Consumer confidence has dropped sharply in recent months, with expectations for the economy’s future sinking to a 12-year low. With headlines warning of a potential recession and uncertain days ahead, it’s natural to feel uneasy. What does this really indicate? And how can you get ready?
Below we’ll explain what consumer confidence measures and offer practical steps to take if the news and the consumer confidence reports are making you nervous.
What is consumer confidence?
When markets slide and unemployment climbs, people get anxious. Consumer confidence is captured through surveys that measure public sentiment about topics such as the current job market, prospects for income and the overall condition of the U.S. economy.
The survey results are compiled into a couple of economic gauges that help officials and the public judge economic conditions. These include:
“Higher consumer confidence shows people feel comfortable covering bills and earning more,” said Marc Guberti, an expert contributor for Annuity.org and a Certified Personal Finance Counselor. “If consumer confidence falls, policymakers can adjust measures to reduce extra costs and help people feel more secure about meeting expenses.”
Perception versus reality
Feeling worried isn’t the same as a factual change. Consumer confidence surveys reflect how people feel, but they don’t foretell the future. Still, they often move in step with important economic signals like:
- Retail sales
- Hiring patterns
- Housing market activity
- Stock market trends
News coverage can also shape consumer actions. Robert R. Johnson, PhD, CFA, CAIA and professor of finance at Heider College of Business, Creighton University, calls this a self-fulfilling prophecy.
“Current headlines are focused on the possibility of a recession, and even the perception of reduced wealth can prompt consumers to spend less than they otherwise would if they expected prosperity,” he says. “That behavior can itself help create a recession. When consumers pull back their spending enough, they can contribute to economic decline.”
What happens when confidence drops?
History shows that declines in consumer confidence can have material effects on the economy. Here are several ways that can happen.
Reduced spending
When confidence is weak, people often trim discretionary spending to prepare for possible hardships. This is most obvious with large purchases such as cars, furniture and electronics. Travel and vacation plans may be postponed until conditions appear more favorable.
“One of the key drivers of consumer spending is the ‘wealth effect,’” Johnson noted. “The wealth effect is the change in spending that comes with a change in real or perceived wealth. When people feel wealthier, they usually spend more than when they feel less wealthy.”
Less business investment
Companies may interpret low consumer confidence as a signal of rough waters ahead and pull back on expenditures. Hiring may slow or even reverse, expansion plans could be shelved and other budget cuts implemented. Those actions can ripple through the economy.
Market turbulence
Market swings are common, and consumer confidence can influence investor behavior. Investors may sell stocks quickly or retreat from new investments, which can put downward pressure on markets.
“Dumping shares of solid companies and ETFs during market lows is a big mistake,” Guberti adds. “We saw poor market performance in 2018 amid tariff concerns, but stocks rebounded strongly in 2019 and surpassed 2018 levels.”
Policy responses
Shifts in consumer confidence can prompt policymakers to act. The Federal Reserve might alter interest rates, or elected officials could propose stimulus measures to encourage spending and stabilize the economy.
4 steps you can take when consumer confidence dips
Headlines may leave you wondering how to protect your finances. Lower confidence is a useful reminder to review your financial house. Here are actions to consider.
1. Build an emergency fund
If you don’t already have one and you can afford to, creating an emergency fund gives you greater control. With interest rates elevated, parking that cash in a high-yield savings account or a short-term CD can also earn modest returns.
“This fund will provide financial peace of mind regardless of outside events or personal challenges,” said Kelly Renner, owner and Certified Financial Planner Professional at Life Strategies Financial Partners.
2. Avoid panic moves
One of the worst mistakes is selling stocks and ETFs when their values fall. Guberti recommends holding onto investments through downturns, since markets historically recover in the years after a drop.
“Only put money in the stock market that you’re comfortable not touching for the next 5 to 10 years,” Guberti advises. “Actions taken out of panic are likely to be regrettable.”
3. Create lasting habits
This is an excellent moment to examine your budget. You don’t have to make drastic changes because confidence is low, but understanding your income, expenses and savings gives you more confidence moving forward.
“Review your budget, identify costs to eliminate and seek ways to increase income,” Guberti suggests. “These steps are smart no matter whether consumer confidence is high or low.”
4. Keep the big picture in mind
It’s easy to let national headlines dictate how you feel, but they don’t always reflect local realities. Even if the broader economy is under stress, your local situation might be stable enough that you can navigate any turbulence without major harm.
“This period is deeply troubling for some people,” Johnson said. “For example, people who’ve lost government jobs face real uncertainty and their confidence should be very low. I don’t mean to downplay their hardships. But for many Americans, unemployment remains low (well below long-term averages) and inflation has started to steady.”
The consumer confidence index can signal economic shifts, but it doesn’t tell the whole story. While falling confidence can hint at slower growth, it isn’t definitive. The smartest approach is to monitor developments while making reasoned financial choices, rather than reacting to each headline.
Rachel Morris is a finance writer with more than a decade of experience. Her articles have appeared on a range of top personal finance sites, including Money Under 30, GoBankingRates, Retirable, Sapling and Sifter.
