GDP Growth and Consumers' Perception of Well-Being

Updated January 31, 2014

While we keep reading mainstream media reports that the United States recovery is underway and that consumer confidence is at its highest level since before the Great Recession, as you will see, consumer sentiment is in the eye of the beholder.

Here is a chart from FRED showing consumer sentiment since the beginning of the Great Recession:

The current reading of 81.2 which is not reflected in FRED's database is up significantly from its Great Recession nadir of 55.3 seen in November 2008.  That's just wonderful, isn't it?  All must be well even though the rate has dropped from 85.1 back in July 2013.

Before we draw any hasty conclusions, let's look at a graph that shows a more complete history of  consumer sentiment dating back to the mid-1970s:

Unfortunately, just prior to the plunge in confidence, the University of Michigan Consumer Sentiment reading hit 96.9 at the beginning of 2007, just before the wheels fell off America's economic bus.  In fact, for the entire period between November 2003 and March 2005, consumer confidence was above 90, peaking at 103.9 in January 2004.  Going back even further, during the halcyon days of the Clinton Administration in the last half of the 1990s, consumer confidence remained firmly stuck at a level in excess of 100 for the entire period between March 1997 and November 2000 save for one single month when it fell to 97.4.  Even during the dark days of late 2001 after the World Trade Centre attack, consumer confidence only fell to a low of 81.8 and was below 90 for only four short months between September and December 2001 and then snapped back up to above a reading of 90 until July 2002.

A lack of consumer confidence has led to rather anemic annual growth (i.e. no growth) in consumer loans compared to the recovery after the 2001 recession as shown here:

If consumers aren't willing to expand their borrowing, for the most part, their ability to spend and stimulate the economy is somewhat restricted.

To put this rather modest improvement in consumer confidence into perspective, here is a graph showing the percentage of GDP that consumer expenditures are responsible for:

With consumer spending comprising such a significant portion of GDP, until consumers feel an increased sense of economic well-being similar to what they felt a decade ago, it is unlikely that GDP growth will remain anything but modest.