Blogs & Comment

Will the Boston bombings hit consumer confidence?

Consumer confidence can rebound.

We don’t know yet who’s behind Monday’s twin explosions at the Boston Marathon that killed three and left over 170 wounded. But even before authorities started talking about “an act of terrorism,” that’s what we all thought. Be it foreign or domestic, it’s hard not to think it was all carefully planned to kill, hurt and make us feel unsafe all over again. It turns out the images of the Oklahoma City bombing, 9/11, Madrid’s torn-apart commuter trains and the London attacks in 2005 are fresher in our minds than we thought.

Will the blasts deliver an economic blow as well? They could if they affect our plans to spend. A drop in consumer confidence is the most likely way in which the effect of the marathon bombings might reverberate far beyond the confines of Boston business — and north of the border too. Consumer spending still counts for two-thirds of the U.S. economy and Canada needs Americans to buy now that our own domestic demand is cooling.

Terrorist attacks seem to have a limited and short-lived impact on consumer sentiment yet the Boston bombings come at a time when the economy is still weak, and it is uncertain whether this attack will have a longer term impact.

The link between acts of terror and our confidence in the economy and thus our spending decisions is much less straight-forward than one might think. “I wouldn’t be surprised if we saw a dip,” says Todd Crawford, a senior economist at the Conference Board of Canada, which regularly surveys Canadian consumers (its sister organization in the U.S. compiles the same monthly index south of the border, which is one of two top gauges of American households’ spending intentions, along with the University of Michigan’s Surveys of Consumers). But, adds Crawford, the Boston bombings might not be the chief cause of consumers’ souring mood. With grim data on Chinese economic growth, disappointing U.S. job numbers and, in Canada, declining home sales, there is plenty of bad news with much more obvious economic implications.

Even in the case of 9/11 the evidence on terrorism and consumer psychology is murky. In August 2001 the Conference Board’s Consumer Confidence Index in the U.S. read 114. By the end of September, it was at 97, below the 100 benchmark for positive sentiment. However, “the public’s optimism about the economy and their personal financial situations was dropping rapidly in the months, and even in the last week, before the September 11 terrorist attacks,” a Gallup report noted on October 2. Besides, the 17-point drop was largely based on data collected before the attacks. The question then, concluded Gallup, was whether the World Trade Center attacks would accelerate an already established negative trend.

The Conference Board’s index shed a further 11.7 points in October, a steep fall but a smaller one than that registered a few weeks earlier, when most Americans respondents hadn’t yet seen the images of two passenger airliners crashing into a New York City landmark. It’s hard to say whether 9/11 caused that second plunge or contributed to it at all — pinpointing and ranking the drivers behind consumer confidence shifts is always a bit of a guessing game. What we know, though, is that by December the index was already bouncing back.

US CONSUMER CONFIDENCE

Source: the Conference Board

Canada shows a similar limited impact: confidence dipped in September and October 2001 but not nearly as much as did it in 2008-2009, for example.

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And that was the largest terrorist attack in modern Western history — one that would have a deep and wide effect on the global economy well beyond consumer and investor sentiments. The impact of the other attacks seems to have been even more contained. Consumer confidence in London dipped after authorities uncovered a second plot to plant bombs on buses and trains after the deadly July, 7 2005 bombings, but many people simply opted to avoid public transportation and take their business to the City’s suburbs, partially offsetting the temporary dearth of shoppers downtown.

Still, the Boston bombings might well affect consumer confidence in the next few weeks. If they do, it would be at a time when both the U.S. and Canadian indexes are woefully low. South of the border, the March reading was 59.7, well below the post-9/11 low. In Canada, where it is measured against a different baseline year, it was 80.5, a bit better but far from glamorous. As Crawford put it, “We’re already in rough shape.” Even a small additional hit might rattle the economy further.