One indicator that has worried me a little is the latest consumer confidence index (covering the month of September) that nVision has calculated based on the monthly European Commission survey. Consumer confidence had been hovering around the same broad level ever since the recession ended in Q4 2009, some way below the ‘Nice decade’ level seen from 1996 to 2007 but well above the 2008/09 record lows. But with September’s index falling to -19.3% (from -15.6% in August) the confidence index has dropped to a nervous level. It’s only fallen below this point three times since 1990: the 1990/91 recession, the 2008/09 recession and the fourth quarter of 1992 (the quarter immediately following Black Wednesday).

Why is this worrying? Consumer confidence and consumer spending tend to follow each other reasonably well. Take a look at the below chart comparing the two. The match isn’t perfect but there’s a broad pattern here.

I think consumer confidence over the next four months bears monitoring closely. This will give us the opportunity to (a) assess the impact of the Spending Review on consumer mindsets and (b) see what impact the VAT increase at the start of 2011 will have on consumer sentiment. It could be that the removal of the sheer uncertainty about what was to be cut will reassure; or it could be that Ed Balls is right and the government has got the fiscal equation badly wrong. It will be an interesting few months!