Any economist will tell you that it’s not a good idea to gauge the health of the overall economy alone from the position—or the activity—of the stock market. But the Wall Street indices may be just as deceiving in trying to plot where consumer spending is going.

The stock market swings of the week of Aug. 8—on  Aug. 12 Bloomberg reported the S&P 500 index rose or fell at least 4.4 percent in the previous four sessions—is easiest understood as a response to a few events: the long and complex debt ceiling negotiation in the United States, concerns about government debt in several European countries, and continued labor market weakness in the United States. The first lowered confidence in how capable the U.S. political system is of dealing with long-term fiscal issues, according to S&P Managing Director John Chambers. Europe’s financial woes are a cloud that will continue to hang over global economic expansion. But the most relevant factors for U.S. consumers and businesses are actually the labor market and consumer spending—and the picture there may be a bit more positive.

U.S. jobless claims dropped to a four month low of 395,000, arguably a sign the job market is stabilizing and even improving. At the same time, retailers reported the biggest sales increase in four months. By the end of the week, the stock market appeared to be on the upswing. Job market and retail spending data point to a slow recovery, not abject calamity. While swings in the stock market and news of a downgrade in the U.S. credit rating are not positive stories, it would be a mistake to place too much credence on these factors when trying to impute the motives of U.S. consumers going forward.

Consumers are unlikely to change their budgeting and spending plans for the future based on one week’s activity in the stock market. More likely, the gyrations are apt to cause consumers to feel wary rather than simply positive or negative; consumer sentiment was at an historic low at the end of the week, but the reasons cited so far were the labor market and low wages, not stock market volatility. When 401(k) statements come out at quarter’s end, some consumers may see changes to their portfolio, but that is a lagging indicator, and by then market conditions may be wholly different.

While the activity of the stock market is certainly noteworthy, it is hardly cause for long-term adjustments, as only 54 percent of Americans hold individual stocks in their portfolios—the lowest level since 1999. Those looking to understand the future of U.S. consumer will be much better served by examining underlying trends in the labor markets and consumer spending. Those who try to follow the galloping horses of the market will only find themselves exhausted.

Topics: Economic Outlook