U.S. consumer confidence has been weak, but it is not signaling a recession. That’s according to a report from Sal Guatieri, senior economist at Bank of Montreal Financial Group.

“In March 2003, the potent combination of war jitters, weak employment and volatile stocks had driven American consumer attitudes to their lowest level in a decade,” Guatieri observes. “While confidence has improved somewhat since the Iraq war ended, the still relatively depressed level of sentiment casts doubt on the sustainability of U.S. personal spending and economic growth.”

Guatieri’s study of the literature concludes that there is a positive relationship between consumer attitudes and willingness to spend. “Although the confidence data generally act as a proxy for the influence on demand of other variables, especially labor market trends, they do contain some additional information about current and future consumption.”

He finds that the confidence data add five percentage points of explanatory power beyond that which is provided by data on labour markets, personal incomes, interest rates and equity prices. “Our results differ somewhat from other analytical studies that find little additive predictive power in the confidence data,” he says.

That said, according to its model of consumer spending, recent weakness in consumer confidence is, “neither flagging a further decline in consumption growth nor a recession”.

“Offsetting positive factors, like healthy income growth and low interest rates, are helping to shore up demand,” Guatieri finds. “Consumer confidence, along with stock prices and income growth, would need to fall sharply from recent levels to trigger a consumer-led recession.”

He finds that even if consumer confidence drops 5 points, real stock prices fall 5%, and income growth is half its assumption, growth would come in around 0.4% per quarter from Q2 to Q4. “Although the predicted pace of consumption growth is half the normal pace, the economy would likely avoid recession.”