Consumer Confidence Plunges

Consumer confidence plunged in the week ended Aug. 19, according to the latest weekly consumer-sentiment survey released by ABC News. Its consumer-sentiment index plunged 9 points to -20, beating the previously largest decline of 7 points in February 2004 and February 1990.

The decline indicates that Main Street is quite aware of recent developments on Wall Street and that it is already seeing its effects, via higher interest rates and reduced credit availability, for example.

When coupled with recent data on car sales, which have fallen close to decade lows, the decline in consumer confidence looks like more than just a knee-jerk emotional response to volatility in the financial markets.

There are many drops in confidence that aren't worth worrying about. This isn't one of them. This decline is rooted in a change in fundamentals more so than usual. The data support the need for a cut in the federal funds rate.

Most troubling is the 10-point decline posted in the index on personal finances, which fell to +6 from +16, its lowest since October 2004 and well below the average of +17 since that time.

The personal finance component captures changes in income growth, wealth and credit, hence capturing the consumers' wherewithal to spend. This is what makes the personal finance component so important; the consumers' assessment of the future is less important than his/her ability to spend.

Also down sharply were indices on the purchasing climate (-30 vs. -22) and the state of the economy (-36 vs. -26).

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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