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Economic Impact: Consumer confidence is running high

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Consumer confidence was higher in August than it has been since October 2000.
The Conference Board’s index, which is published monthly, reflects consumers’ perception of business health, employment and income for the current month as well as six months into the future.
Since it is indexed to 1985, the August 2018 value of 133.4 means consumers feel about 33 percent better about today’s economic conditions than they did in 1985.
As a point of reference, the unemployment rate averaged 7.2 percent in 1985 and was decreasing over the year. Inflation, which started the decade of the 1980s with double digits, retreated to 3.5 percent in 1985 and slowed further in 1986.
In 1985, President Ronald Reagan started his second term in office, the Food and Drug Administration approved a blood test for AIDS, 21-year-old Whitney Houston released her debut album, and Microsoft Corp. released its first version of Windows 1.0.
The previous recession ended in November 1982 and the economy continued to grow until entering another recession in July 1990.
The Consumer Confidence index is widely watched because it is one of the first economic indicators available each month.
It is also important because consumer spending makes up about 70 percent of gross domestic product.

Historically, however, consumer spending and confidence only show a tight correlation around recessions — confidence drops off rapidly as the economy deteriorates and the unemployment rate rises.
In contrast, when economic performance starts to improve, confidence shoots up and consumer spending increases, especially on high-dollar items that consumers delayed purchasing for fear that their jobs might get cut.
Now, back to the present. Consumer optimism also improved in August with an increase in the percentage of consumers anticipating improved business conditions.
With the unemployment rate continuing to decline and many consumers benefiting from the federal tax cuts, consumer optimism is yet one more signal of favorable conditions for continued growth.
There are no apparent imbalances or bubbles that will precipitate a recession anytime soon, which points toward increasing consumer confidence in the months ahead.

(This column first ran in the Richmond Times Dispatch on September 3, 2018)
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