Investing - Why Consumer Confidence is Critical to an Economy - Your Money Your Knowledge
January 28th, 2009 |A good understanding of how consumer confidence can affect the economy will enable you to navigate well in this complex business world.
What is consumer confidence? And how it will affect the economy? This two fundamental questions will be answered in this article and you will be able to see the effect in our modern world.
Consumer confidence is basically the belief of the consumers on the outlook of the economy. If the consumers feel that the outlook of the economy is bad and will get worse, then they will cut back in their spending and save more for the raining days. On the other hand, if the consumers feel that the outlook of the economy is good and will get better, then they will continue to spend and some even will borrow their future wealth and spend today.
In the former case, the impact to the economy is detrimental. With the cut back in consumer spending, the economy will slow down and not as robust as before. This will eventually lead to reduction in factory supplies and downsizing of the manufacturing facilities in order for the companies to cope with the reduction in demand.
In the latter case, the impact to the economy is positive. With the increase in spending by the consumers, it will lead to increase in demand and the manufacturers will increase supply to meet the surge in demand. This will bring an upward spiral to the economic growth.
Hence, in today context, we see that the consumers’ confidence is very low and many has cut back in spending. The bank is also not lending out money and as a result, the money supply in the economy reduced. If you remember in my previous article, I mentioned that money powers the economy and with a reduction in money supply, the economy will not grow but will shrink. Hence, it is very important for consumers’ confidence to return and start the spending cycle.
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