How strong is the feel good factor?

How strong is the feel good factor? Rejected credit card applications are rising, credit card fees are increasing and business debts are growing - 25% of businesses in the UK now have interest repayments that exceed their profits. There are signs that the growth of consumer credit and spending is slowing and starting to have a significant impact on the economy.The major high street retailers are already starting the annual process of downgrading expectations about just how much we are likely to spend on the high streets, shopping malls and online this Christmas! Perhaps they feel that dampening down forecasts of retail sales now will allow them to relax in the warm glow of “better then expected sales” when they come out the other end at the conclusion of the January sales. How much impact does the ‘feel good factor’ actually have on our spending decisions? We are told frequently that consumer confidence is a key driver of spending. The state of optimism or pessimism about jobs, incomes, prices and the our own financial circumstances are said to impact directly on our willingness to get out the credit card and borrow to the hilt! But perhaps the feel good factor is overdone? Willem Buiter discusses this in his blog on the Financial Times website. A nice twist on the idea that inexorably rising house prices must inevitably create the elusive ‘feel goof factor’ “Feel good factor”. ‘This is the argument that when house prices go up, home owners get a buzz, feel happy and go out and spend. It’s hard to know what to make of this. If there is a feel good factor for homeowners when house prices rise, there must be a feel bad factor for all those missing out on the capital gains because they do not own real estate – people for whom it may now have become harder to get a foot on the housing ladder. Also, does the feel good factor actually cause you to spend more? The feel good factor is not the same as consumer confidence, which is positively correlated with consumer spending. My wife spends more (mainly on shoes) when she feels bad – and she is a professor of economics.’ More here: http://blogs.ft.com/maverecon/2007/10/ok-then-housing.html The Independent reports today that ‘consumer confidence remains resilient’