According to a new poll, 75% of Americans are at least “somewhat worried” that the economy is about to enter recession. This is bad news, not because I think it means we’re headed for recession but because I think it means that recovery will continue to be long and painful. The reason I say this is that it signals a lack of confidence on the part of consumers. Before I get into that, though, I should clarify my use of the word. I not too infrequently use the phrase “confidence fairy” to combat the idea, widely held on the right, that by enacting harsh austerity measures, investors will gain confidence in our economy again and bond yields will go down, and if not we become Greece. Austerity will solve all our problems, because confidence! Hence the confidence fairy. So what’s the difference between the confidence fairy and consumer confidence? Well, for starters, investor confidence (the fairy) just isn’t our problem. Bond yields are historically low and real yields are negative. This has been the case for some time. So the markets seem perfectly confident.
But consumer confidence is low. This is a problem because a consumer that fears things are about to get worse is a consumer that will shift as much of their income as they can (or are willing to) from consumption into savings, or into paying down debt more rapidly. They’re afraid that they’re one tepid quarterly earnings report away from mass layoffs, and so they either want to save up enough to pay the rent when they lose their jobs, or eliminate debt so they’ll have one less payment to worry about. They go out to eat less and they put off remodeling their kitchen or buying that shiny new thing they’ve been eyeing. These are all smart moves for an individual to make, but collectively they mean reduced demand at local businesses, which leads to job losses and, you guessed it, less confidence. And so we have a negative cycle. Now I’m not arguing that if everyone would just stop worrying and buy a TV that everything would be fine, this is certainly not true. But a lack of consumer confidence doesn’t help matters.
520 Chestnut 
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