Before crash, we spent more, but liked it less

Consumer confidence and consumer spending had generally walked hand in hand over the past 30 years -- sometimes rising, sometimes falling, but rarely straying too far from one another.

That all changed somewhere in the middle of this decade, according to a new essay from economists with the Federal Reserve Bank of Chicago. At that point, Americans' consumer confidence leveled off or even fell, and our spending just kept growing and growing -- until the economic crash of late 2008.

The chart on this page illustrates the point. It compares consumer spending data from the U.S. Department of Labor to the Index of Consumer Sentiment, which is derived from consumers' response to the following question as part of the quarterly Surveys of Consumers by Reuters and the University of Michigan : "Generally speaking, do you think now is a good or bad time for people to buy major household items?" The more yes answers, the higher the index number.

The consumer sentiment data is through the first quarter of 2009, though the chart's most recent spending data comes only from the end of 2006. However, all indications are that the upward trend likely continued for another year to 18 months. (For example, the Fed's monthly G.19 report shows that consumer credit use grew by 5.5 percent in 2007 and also grew for the first three quarters of 2008, all indicators of consumers' continued spending.)

In short, at that time, people wanted to spend, and lenders were bending over backward to allow them to do so. Lax lending standards made credit super-easy to get, even if it was more than borrowers could realistically afford. Booming housing values made people feel like -- and oftentimes act like -- millionaires, even though that wealth was only on paper. The stock market was growing like crazy. Unemployment was low.

Back then, it made sense. It's logical that if you feel good about your own financial situation -- and that of your city, state and country -- you're more likely to plunk down some of your money on that new 42-inch flat-screen HD TV so you can watch football on Sundays or buy those stainless steel appliances that make your house look like a model home.

However, this chart seems to indicate that even as they spent, consumers had an inkling that things might not have been as good as they seemed -- or at least not as good as they had been in the recent past. They remained undeterred in their spending, however. Or perhaps they were just in denial, though that all ended in late 2008, when the economy came crashing down around us.

Right around that point, consumer confidence and consumer spending started walking in the same direction again, even if they were no longer holding hands.