Consumer confidence plunged to its lowest level in two years in August following the divisive battle in Congress over the debt limit and Standard & Poors historic decision to cut the U.S. credit rating.
The Conference Boards Consumer Confidence Index fell nearly 25% to 44.5 after rising slightly in July to 59.2 from the prior month. It was the lowest reading since April 2009 and the biggest month-to-month decline since October 2008 at the height of the financial crisis.
The gloomy sentiment helped kill Mondays stock market rally and the Dow Jones Industrial Average spent much of todays session bouncing in and out of positive territory.
Consumer confidence deteriorated sharply in August as consumers grew significantly more pessimistic about the short-term outlook, said Lynn Franco, director of the Conference Boards Consumer Research Center.
Franco said consumer sentiment was spiraling downward even before S&P, citing its view that the U.S. was not likely to get a grip any time soon on its massive debt problems, knocked the U.S. credit rating down a notch on Aug. 5.
The downgrade announcement prompted a massive selloff on Wall Street and stock markets have been extremely volatile since.
Consumer confidence is always impacted by high-profile stock market moves.
Adding to consumers fears are long-terms concerns for their jobs. The U.S. job market is virtually stagnant, hovering stubbornly above 9% for months, and nothing seems able to jar it from its malaise. Meanwhile, home prices continue to fall and myriad other lousy economic data has caused some economists to predict a double-dip recession.
Also released Tuesday was the S&P/Case-Shiller index of property values in 20 cities, which dipped 4.5%. Many Americans are seeing their net worths decline as the value of their homes fall, another factor weighing on consumer sentiment.
The American outlook of business conditions, employment, and personal finances has nose-dived during the month of August. In addition, many people feel that the current employment conditions have gotten worse, said IHS Global Insight U.S. Economist Chris Christopher.
Consumer confidence is a key indicator for economic growth because it indirectly gauges demand for consumer goods. If consumers feel good about their financial well-being theyre likely to go out and spend their paychecks. But if consumers arent earning a paycheck or feel that paycheck may disappear they are going to scale back on their spending.
Consumer spending makes up 70% of the U.S. economy. If spending declines demand slows across the board and economic growth stagnates.
According to the Conference Board, nearly every aspect of consumer confidence fell in August: consumers who believe jobs are "hard to get" increased to 49.1% from 44.8%, while those stating jobs are "plentiful" declined to 4.7% from 5.1%.
In addition, consumers short-term outlook deteriorated sharply in August, the New York-based research group said. Consumer who believe business conditions will improve over the next six months decreased to 11.8% from 17.9%, while those expecting business conditions to worsen jumped to 24.6% from 16.1%. Consumers who anticipate more jobs in the coming month fell to 11.4% from 16.9%, while those expecting fewer jobs rose to 31.5% from 22.2%.