Consumer Shock

By Paul Carton and Andy Golub

The financial events of the past few weeks have led to a reflexive recoiling on the part of U.S. consumers.

The latest ChangeWave consumer survey -- conducted in late September -- shows another major leg down for U.S. consumer spending. At the same time, confidence in the economy has dropped to exceptionally low levels.

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Hunkering Down

Despite an already severe 15-month contraction, U.S. consumer spending is suddenly veering south, with 52% of our 4,067 survey respondents now saying they'll spend less money during the next 90 days. That's down eight points since August. Only 18% said they'll spend more -- six points worse than in August.



Reasons for Spending Less

More respondents said they are spending less because they're reducing debt (up four points to 29%) or saving more money (up five points to 26%), showing that anxiety about financial well-being is increasingly driving consumer behavior.

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General inflation and higher energy costs still rank as the top two reasons consumers cited for spending less, but in one of the survey's few bright spots, their impact continues to slow for the second-consecutive survey.

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U.S. Credit Crisis' Impact on Consumers

The extraordinary events of the past few weeks have been well documented -- including the Lehman Brothers (LEHMQ) bankruptcy, the U.S. government takeover of Fannie Mae (FMN) and Freddie Mac (FRE), the $85 billion loan to AIG (AIG), and the government's $700 billion bailout bill to help stem the credit crisis and calm the turmoil impacting financial institutions and the stock market.

The end result has been a huge loss in confidence in the U.S. stock market. Sixty-nine percent of respondents said they're less confident in the U.S. stock market than they were 90 days ago. Only 7% said they are more confident.

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The immediate repercussion of the crisis on investors is also clear.

When we asked respondents where they would be investing more or less money, we picked up a huge outflow from U.S. stocks (-20), mutual funds (-14) and non-U.S. stocks (-6), and a major inflow into cash (+24), gold (+22), income/dividend vehicles (+11) and other commodities (+8).



To compound matters, 66% of respondents said they think the overall direction of the U.S. economy is going to worsen during the next 90 days -- a huge 27-point jump since August, and the worst reading in the past year.



Clearly much of this sea change is related to the credit crisis and other recent events in the financial markets.

In the aftermath of the approval of the bailout bill, our current survey points to continued turbulence in the stock market. As the survey shows, we're in the midst of another major leg down in the consumer-driven economy with no signs of a turnaround in sight.

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Paul Carton is the Director of Research for the ChangeWave Alliance Research Network. Andy Golub is ChangeWave's Associate Director of Research. The Research Network is a group of 20,000 highly qualified business, technology and medical professionals -- as well as early adopter consumers -- who work in leading companies of select industries. ChangeWave surveys its Network members weekly on a range of business and consumer topics, and converts the information into a series of proprietary quantitative and qualitative reports.

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