How is an economy typically affected when consumer confidence declines?

When consumer confidence declines, it typically results in decreased consumer spending. This is because consumers tend to become more cautious about their financial situations when they lack confidence in the economy. They may worry about job security, financial stability, and future income, prompting them to cut back on expenditures. As a result, discretionary purchases are often first to be affected.

Lower consumer spending impacts businesses, leading to reduced sales and potentially lower production levels. In turn, businesses may respond by cutting back on investment in equipment, hiring, and expansion plans due to uncertainty regarding future demand. Thus, a decline in consumer confidence generally creates a negative feedback loop that can slow economic growth.

In contrast, investments by businesses or significant improvements in trade balances are less likely during such a decline, as companies opt for cautious strategies and consumers reduce demand for imports.