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The Conference Board reported this morning that US consumer confidence fell this month to 105.0, down from a level of 111.9 just last month. The drop in the consumer confidence number was the largest one month drop since Hurricane Katrina. The 105.0 reading is also the lowest reading in a year. The Conference Board surveys 5,000 U.S. households monthly to measure consumers optimism on the economy.                                              

The level of consumer confidence is absolutely vital to the US economy because consumer spending accounts for 2/3 of the US economic activity. Any significant slowing in consumer confidence is likely to cause a widespread slowing of consumer spending, and spendthrift shoppers can slow down an economy very quickly.

What was behind this plunge in consumer confidence? A combination of financial market volatility and lower house prices is likely behind the drop. Consumers are generally quick to lose confidence when the major stock indices drop quickly, just as they did from the end of July through the middle of August. The real estate market problems are certainly hurting consumer confidence as well since homeowners are either having trouble selling their home, or understand that their home is worth less now than it use to be.

It is important to note that the current level of 105.0 is still a relatively high confidence number. In the grand scheme of things, confidence is still strong. The large drop month over month is the most concerning part of this report. The important thing to look for will be whether there is continued drops in consumer confidence in months to come. If consumers continue to be spooked by credit market problems and the housing downturn, the economy as well as the major indices will be in for trouble. The direction of the economy is very much uncertain right now, and consumer confidence numbers in the next few months will be an important datapoint to keep an eye on.