Consumer Confidence Is Killing the Economy

Consumer confidence
Consumer confidence

"Consumer sentiment tumbles to historic low"

-- Reuters

"Economic gloom puts stranglehold on spending"
-- Pittsburgh Tribune-Review

"Wall Street plunge could cut consumer spending by $140B"

With headlines like these, high unemployment, debt-ceiling drama, and a rocky stock market, who wouldn't feel down in the dumps about the economy? So most people do what comes naturally during scary times -- we scrutinize our spending and cut back on dining out, movies, and back-to-school shopping. Then we wait for a bigger sign from on high that things are looking up.

Since much of what fuels a recovery is simply consumers starting to feel like things are going to get better, economists and journalists rely on "consumer confidence" metrics to take our overall temperature, and then tell the general public how

everyone else is feeling about their finances.

Therein lies the rub: The more we hear those gloom, doom, and despair headlines, naturally, the more our perception of the economy worsens and, as a result, our confidence levels fall even further.

Consumer confidence
Consumer confidence

Cracking the Consumer Confidence Code

The bureaucratic-sounding phrase "consumer confidence" really just means how optimistic you and I -- the "consumer" -- feel about the economy. If we're feeling good, chances are we're spending more. If we're worried, we're usually spending less.

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There are a few different ways to measure it, but the most popular is the Consumer Confidence Index, a monthly survey of 5,000 households. The numbers are reported every month and then, of course, analyzed to death, which is how we know that consumer confidence is the lowest it has been since 1980.

But as each of us tightens our belts a notch, there's a ripple effect that spreads throughout not only the U.S. economy, but around the world.

Bad Attitudes Travel Fast

Think I'm exaggerating? Consider that consumer spending drives 70% of the economy. If we stop spending, businesses stop hiring and stores stock fewer goods. Then the factories here and abroad that make those goods lay off workers, those workers then spend even less, and so on until we're in a downward spiral.

That's an oversimplification of course, but it's not that far off from reality.

So what does it take to turn consumer confidence around and shake the nation out of the recession? Step 1: Ignore the gloom-and-doom headlines. Step 2: Make the recession work for you.

Four Ways to "Play" the Recession

If you're in a good financial position -- stable job, low or no debt -- there are ways to not only survive but thrive during a downturn. And in doing so, you'll contribute to that 70% of the economy that relies on consumer spending. Here are four ways you can rock the recession.

1. Leverage low rates: The sluggish economy is keeping interest rates historically low, meaning that this is a great time to take out a loan if your finances allow. Mortgage rates in particular are a bargain, so if you've been planning to buy, refinance, or renovate, now may be the time.

2. Work the sales: Lower consumer spending means lots of markdowns as merchants try to entice us to shop. If you're watching your own wallet, take advantage of these deals to stretch your dollars.

3. Keep spending close to home: When you do spend, consider supporting local businesses, which are often taking the hardest hit from the recession. Buying made-in-America products is another good move -- it creates and maintains domestic jobs and reduces our dependence on imports.

4. Go shopping for stocks: When the market drops as dramatically as it has the past few weeks, consider picking up a few shares of your favorite companies. During the recent downturn, I bought a couple of shares of Apple (AAPL), a company I've always wanted to own, for nearly 10% off their high, and added to my position in another favorite holding, Berkshire Hathaway (BRK-A). Keep a watchlist of stocks you like so you know when their prices drop more than usual.

Motley Fool contributor Robyn Gearey owns shares of Apple and Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Apple. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.

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