Headline: Should I Care About Consumer Confidence?

Date: 11/23/2020

Body:  I was scanning Yahoo Finance and I found the following article:

Black Friday sales, Consumer Confidence: What to know in the week ahead (yahoo.com)

I learned briefly about consumer confidence in economics class in college (about 2 decades ago).  But I do remember that I was unsure as to how much value this number had in determining the nature and direction of the larger economy.  As we are getting very close to the holidays, I think this is a good time to review what this index really represents.

What is the Consumer Confidence Index?

The Consumer Confidence Index is an index that looks at consumers’ own appraisals of the present economy and their expectations of future conditions.   The Consumer Confidence Index is based on the Consumer Confidence Survey, which is a monthly survey of 5,000 households. There are five questions asked—two related to present economic conditions and three related to future expectations.  Two questions probe the consumers’ appraisals of the current market conditions, and three questions probe the consumers’ appraisals of what market conditions will likely be in 6 months.  The questions focus on family income and the availability of jobs.

What is the Conference Board?

The Conference Board is a non-profit group that was formed in 1916 to boost consumer belief levels in corporate governance after 3 major business catastrophes, including the fire at the Triangle Shirtwaist Factory that you might remember from your U.S. History classes in High School.  It was started in Boston, by a collection of CEOs worried about how the poor conditions within their factories could negatively affect both their employees and their revenue.  It seemed to really gain prominence during WWI and then in 1919 published its’ first report on cost of living increases.   This led to the Consumer Confidence Index.  History is important here to evaluate the credibility of the organization administering the survey.

Criticisms of the Index.

I have found various articles by credible sources and they seem to be about evenly split on whether the CCI is a leading or lagging economic indicator.   I suppose a cogent argument could be made for each given the distribution of the questions, but, I find it disconcerting that this issue is in dispute.  (Any doubt why economics has been considered, “the dismal science.”?)

The Federal Reserve Bank of Kansas City did a study of this index, and the conclusion was as follows:

“I found very little evidence that they were useful predicting consumer durable spending.”

The report goes on to observe that the CCI often ran in a nearly opposite direction compared to another index of consumer confidence during the 1980s.  Despite this word of warning, I think that the number might still be of some value, as consumer spending represents more than 68% of the economy per Inc. magazine.  Since durable goods (think cars, washing machines and kitchen ranges) are often priced out and budgeted for, over a number of months, this might still have some value.  One economist opined that this index might be more a measure of the business cycle than a measure of consumer confidence.  

So, what does this all mean to me and my household?

Much is made of the Consumer Confidence Index in the media.  But it seems like a rather small sample and the questions that are asked have only 3 responses: positive, negative or neutral.    As it seems likely to be a prediction of the future for the business cycle, I think that people should likely take this number as only an indication that total business might accelerate or decelerate in the intermediate future, not an economic exclamation point   I think of it more as a yellow light than a flashing red on the dashboard of the economy.  

On a personal level, I think this might be a signal to prepare to buy large ticket items.   As confidence declines and demand slackens, retailers need to move their inventory, and they might be more apt to institute a meaningful sale.  At the very least, it is a signal to the consumer that negotiation might be more possible.   This knowledge should give consumers some confidence.

REFERENCES

Consumer Confidence Index® | The Conference Board (conference-board.org)

Consumer Confidence Index (CCI) Definition (investopedia.com)

What Is the Consumer Confidence Index? (thebalance.com)

Consumer Confidence Surveys: Do They Boost Forecasters’ Confidence? (stlouisfed.org)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.