What Shock Events Like The Debt Ceiling Crisis Do To Consumer Sentiment

On Friday, Reuters and the University of Michigan released the preliminary consumer sentiment index for August. This showed a sharp decline in sentiment to 54.9, the lowest level in 30 years (see graph below).
My reaction was the decline in sentiment was related to the heavy coverage of the debt ceiling debate, and not due to the usual suspects: gasoline prices or a weakening labour market. Of course consumer sentiment was already low because of high gasoline prices and a weak labour market, but gasoline prices are now falling and initial weekly unemployment claims have declined recently (the key for sentiment is that neither appears to be getting worse rapidly).

I looked at some of the previous spikes down in sentiment due to fairly short term events: 1) the 1987 market crash, 2) the Gulf War, 3) 9/11, 4) the Iraq Invasion, and 5) Hurricane Katrina. These events are apparent on the following graph (along with plenty of noise):

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Click on graph for larger image in graphic gallery.

There are other reasons for declines in sentiment, but I was looking for event driven declines. Note: It is more unusual to see sentiment spike up due to an event – perhaps the capture of Saddam Hussein in Dec 2003 led to an increase in sentiment in the January 2004 report.

Looking at these five events (table below), some of the declines were related to other factors (like an increase in oil prices) – and some lasted longer and had a direct impact on consumption.

My feeling is the debt ceiling decline – assuming the decline was due to the insanity in D.C. – is most similar to the 1987 stock market crash (that scared everyone, but had little impact on the economy) and to Hurricane Katrina (although Katrina led to higher oil prices and a direct impact on consumption in several gulf states).

If I’m correct, then sentiment should bounce back fairly quickly – but only to an already low level. And the impact on consumption should be minimal. Of course sentiment could have declined because of other factors (weak labour market, European financial crisis, etc), and then sentiment will probably not bounce back quickly.

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