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Why Are Consumers So Glum?

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Consumers turned decidedly grim in August.

Consumer sentiment as measured by the University of Michigan declined 12.6 percent in August.The Conference Board’s index of consumer confidence fell by 24.8 percent.

What is driving this fall in consumer sentiment? At the Delivering Alpha conference this week, Treasury Secretary Tim Geithner firmly blamed the fight over the debt ceiling. The idea that government "dysfunction” had become a drag on the economy was echoed by many of those both on and off the stage at the conference.

The Milken Institute decided to attempt to quantify the cause of declining consumer sentiment. What they found was very interesting—politics really does seem to drive consumer confidence.

For both consumer indexes, the approval rating accorded to Congress is significant and meaningful.

So, of course, are a host of other variables. The performance of the stock market—as measured by the S&P 500—also tracks consumer sentiment. Home prices explain “a great deal of the depth and duration of the decline in consumer confidence durng the Great Recession and its aftermath.”

The good news from the report is that the measures of consumer confidence are becoming less reliable predictors of actual consumer spending.

The title of the Milken Institute’s report is “Consumer Sentiment and Spending: Watch What I Do, Not What I Say.”

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