Consumer Spending: A Sentimental Journey?
New York -- The terrorist attacks of Sept. 11 were followed by understandable predictions of a plunge in consumer spending. Those forecasts were based partly on various readings of consumer sentiment, which dropped sharply. Goodbye to one of the few pillars holding up a wobbly economy, observers prematurely concluded.</br></br>Truth turned out to be stranger than fiction. October 2001 will go down in economic history as the month Americans purchased the greatest number of autos -- ever. While that was largely attributed to auto makers' 0% financing offers, it still leaves unanswered why supposedly depressed Americans were plenty willing to visit -- of all places -- car dealerships. Harder to explain still is why the level of retail spending, after falling in September, has been higher in every succeeding month than it was in August. Indeed, even excluding autos, retail sales grew in every month during the past half-year compared with a year ago. All this while the most closely watched of the two main confidence gauges still hasn't topped pre-Sept. 11 heights.</br></br>Could it be that consumer sentiment isn't so closely tied to spending behavior after all? And if so, what does that mean for the U.S. economy now? Carl Steidtmann, chief economist of Deloitte Research, jointly owned by the accounting firm Deloitte & Touch and Deloitte Consulting, believes he has an answer.</br></br>Mr. Steidtmann compared changes in consumer confidence and consumer spending over the past 20 years. His finding: There is very little, if any, relationship between confidence and spending. There are a number of possible explanations for the disconnect, but the most important is that "spending and confidence are driven by a different set of factors," he says. Specifically, politics, disasters and war drive confidence, Mr. Steidtmann concludes, while cash flow drives spending. The twain may or may not meet.</br></br>After Sept. 11, consumer sentiment was buffeted by the terrorist attack, the anthrax mailings and fear of a second blow. But at the same time, cash flow was bolstered by lower interest rates, tax rebates, mortgage refinancings and lower energy prices.