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Why Are Consumers so Confident?

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Consumers are more confident than they've been in six years despite an unemployment rate of 7.6%, and an economy that's growing at a snail's pace. Given the economic backdrop, it seems strange, but I think there are three reasons most consumers are feeling good about their personal situations -- and it may help fuel the recovery. 

The fear of getting fired
In 2008 and 2009, layoffs were rampant, and anyone who had a job was just hoping to keep it. I was one of those who were laid off as the economic fallout spread, and I could see those around me becoming less and less secure in their own jobs. It's impossible to feel confident about the economy or your personal spending when there's a constant fear of losing your job, and that's a big reason why confidence fell.

What's changed since early 2009 is a steady improvement in initial unemployment claims, aka layoffs. In fact, we're now at a level of initial claims for unemployment that matches the low during the 2000s.

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts

Today, people are less fearful they'll lose their jobs, and that may do more to help confidence than anything else.

Stock markets are up
There's some sort of psychological affect the stock market has on people, whether they're active investors or not. When the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and S&P 500 (SNPINDEX: ^GSPC  ) are reaching new highs, people have a positive view of the economy and the companies they work for, whether it's justified or not.

The financial impact can be important for some, as well. When stocks go up, 401ks go up in value, personal portfolios go up, and even pensions look safer than they do in bad times (except for Detroit). 

The bottom line is that a good stock market makes people feel better, and with the Dow and S&P 500 hitting new highs almost every week, it's a confidence boost.

Right side up home values
For homeowners, there may not be anything worse than being upside down on your mortgage. Foreclosure can be devastating, and even a short sale will ding your credit for a number of years, even when it's the right financial move. That's why rising home prices around the country give millions of people a boost of confidence, even when the economy isn't growing.

In June, the median sales price for existing homes was up 13.5% from a year ago, to $214,200, the 16th consecutive month prices have risen. The National Association of Realtors also said that the annual rate of sales of homes rose 15.2% last month to 5.08 million, so it's easier to sell your home. 

The boost to confidence isn't just that prices are going up, it's that fewer people are underwater on their homes. When people are underwater, it's harder to take a job elsewhere and sell your home, and people feel more wealthy when they have equity in their homes. All around, it's a boost to confidence.

An economy to be confident in... for most
These three factors should have most Americans feeling confident about their futures, but there's still a long way to go before we can all feel confident. An unemployment rate of 7.6% leaves a lot of people behind, and until that improves, there will be a cap on growth in the U.S. The good news is that consumers are 70% of the economy, and happy consumers means more economic activity and, hopefully, more jobs to fill.

With the American markets reaching new highs, investors and pundits alike are questioning future growth prospects for stocks. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 27, 2013, at 3:25 AM, plange01 wrote:

    terrible earning by companies like expedia tell the true story of how fearful consumers are

  • Report this Comment On July 27, 2013, at 6:55 AM, shineridge wrote:

    Absolute HOGWASH !!!! Retail sales and EARNINGS were DOWN in June, the TRUE unemployment rate is 23% (U-6), America LOST 240,000 full time jobs in June, Housing starts and sales are still DOWN from pre-recession highs. Consumer confidence is STILL at recession levels. Also, home values RISING are ONLY good news for speculators. Higher home values is BAD for people wanting to buy a home to LIVE in. With gas staying WAY too high, food prices skyrocketing, health care, insurance, and educatiion costs RISING, how in HELL can consumers be confident ?!?!?

  • Report this Comment On July 27, 2013, at 8:05 AM, Hyphen007 wrote:

    The American public is simply dumb....and documented as getting dumber every year according to the United States academic rankings published every year.

    Up to 43% of GRADUATING high school seniors are graduating functionally illiterate. Another 20% drop out of school are most likely totally illiterate.

    Few understand basic concepts of amortization and debt.

    And, of this stellar group at the shallow end of the gene pool, the pretty ones get elected to political office.

  • Report this Comment On July 27, 2013, at 8:46 AM, jimesi wrote:

    as soon as you can get out of the stock manipulation market and get some real assets. even the falling dollar will be better than stocks another crash is right around the corner...

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