The media tried hard to spin today's consumer confidence news to convince investors that dropping consumer confidence means nothing. They're dead wrong. Although we don't believe that rising consumer confidence can alone cure the ills of the economy, falling consumer confidence can exacerbate the already dismal economic situation.
A drop in consumer confidence tells us this: fear of unemployment is growing and making Americans more cautious about opening up their wallets. And in this an environment, a plunge in consumer spending can torpedo economic growth. Consumers are slightly more optimistic about the future of the economy than they were last month. They're predicting that the economy will get better because they think it can't possibly get any worse.
But it's a Catch-22. When consumer confidence drops, consumer spending drops, and the economy slows further, causing consumers' outlook on the economy to worsen. And as the slowdown continues, any consumer optimism will disappear -- causing even more damage to the economy and the markets.