Business, U.S. Economy

Consumer spending will be a critical factor in determining whether the U.S. experiences a double-dip recession. Many believe that the decline in consumer confidence reported in August portends, with absolute certainty, a renewed contraction of economic activity.

However, our research calls into question the efficacy of consumer confidence as an accurate predictor of purchasing decisions. Disdain over political gridlock in Washington appears to be behind the recent decrease in confidence, but the public's disgust does not appear to be causing consumers to slam their wallets shut.

• Consumer sentiment as measured by the University of Michigan declined 12.6 percent in August, while The Conference Board's index of consumer confidence fell by 24.8 percent.
  
• Based on our econometric analysis, most of the drop in consumer confidence was attributable to the job approval rating of Congress, which plunged to 13 percent.
  
• Consumer confidence still helps explain consumer spending decisions, but the relationship between sentiment and action has weakened.
  
• July's 0.5 percent jump in real consumption expenditures and August's preliminary number for same-store retail sales indicate that consumption spending will rise at an annual rate of 2.5 to 3.0 percent in the third quarter's GDP report.
  

For more in-depth analysis, read the full report.