The Consumer Confidence Index rose nine points in September to 70.3, an increase from the previous month. While many in the media will report this as positive news for the sputtering economy, as always, the devil is in the details.
The fact that consumers feel more confident means that they will be more likely to go out and spend money: a Keynesian dream come true. However, applauding increased consumer spending ignores the more important points. First, what money are they spending? We have already noted that median household incomes actually fell more during the recovery than they did during the recession. Thus, the increased consumer confidence amounts to little more than the consumers’ confidence to go further back into debt. This is not a good fundamental for the economy. Secondly, increased spending on what? Since there is continually anemic growth in U.S. manufacturing, most of this money will be spent on imported goods, further exacerbating the trade deficit as the U.S. trades paper dollars for tangible goods.
Furthermore, spurring the rise in consumer confidence is a slight improvement of the housing market. The improving housing sector, however, is not based in real fundamental growth. Instead, it is the result of the Fed’s QE3 policy intended to re-inflate the housing bubble. In the near short term, it appears to be having minor success. However since interest rates are already at record low levels and the economy is starting from a position of much greater weakness, any successes will be short-lived, as it will be impossible to fully re-inflate the already-popped asset bubble.
Increased consumer confidence leading to more personal debt should not be applauded. Blowing more and more air into the housing bubble is a vain attempt in preventing home prices from falling to make up for the excess supply of vacant homes on the market. The economy is not going to truly be healed until these very imbalances are addressed and the fundamentals are allowed to correct. Please put away the heroine. It’s time to get clean.