Study: Confidence Readings Failing as an Indicator

Discussion
Sep 20, 2011

Given the depths to which consumer confidence figures have recently plunged, retail revenues have been holding up much better than expected. At least according to one economist, the disconnect is political.

New research by economist Ross DeVol of the Milken Institute in Los Angeles finds that falling stock prices and a weak economy have been only minor factors pushing confidence down and "most of the drop in consumer confidence was attributable to the job approval rating of Congress."

His group studied data from the Conference Board’s Consumer Confidence Index (CCI) as well as the University of Michigan’s Consumer Sentiment Index (CSI) since 1978 along with monthly Congressional job approval ratings from the Gallup polling organization. On the one hand, the study found that changes in consumer confidence aren’t as closely linked to consumption spending as they were in the past. At the same time, it found that Congressional job approval ratings had a "significant and meaningful" impact on changes in consumer confidence.

Analyzing the drop-off in August with the myriad of factors believed to influence consumer expectations, he wrote that the 9.7 percent decline in the S&P 500 recorded in August could "explain some of the anxiety" due to the wealth effect. But he said the stock market and other traditional factors "can’t explain the extent of the plunge in consumer confidence recorded that month."

The CSI declined 12.6 percent in August, while the CCI fell 24.8 percent, crashing to levels reached in late 2008 and early 2009 at the depths of the recession.

"Consumers seem to have been rattled by the partisan rancor in Washington over the discussions to raise the debt ceiling and reduce the budget deficit," wrote Mr. DeVol. "Policy uncertainty doesn’t provide an environment conducive to developing an informed assessment about the future. "

In August, only 13 percent of respondents approved of the job Congress was doing, according to the Gallup poll.

But he said political concerns don’t appear to have as much of an influence on purchasing behavior as other factors driving down confidence. August sales came in basically flat against July figures and up seven percent versus August 2010 and certainly much better than sales trends at the lower points of the recession.

If the trend continues, he estimates consumer spending for the third quarter will rise by between 2.5 and three percent. He added that while some economists are cutting GDP estimates due in large part to eroding consumer confidence, amid talk of a double-dip recession, there’s "room for cautious optimism" given record-low interest rates and a reduced consumer debt levels.

He concludes, "The lesson here? Analysts must watch what consumers do, not what they say, in forming projections for consumer spending and GDP in the current environment."

Discussion Questions: Do you agree that consumer confidence readings have become a less reliable bellwether of consumer spending? What affect do you think the debt ceiling debate has had on consumer spending?

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9 Comments on "Study: Confidence Readings Failing as an Indicator"


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Doug Stephens
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Doug Stephens
9 years 7 months ago

I couldn’t agree more. In addition, it’s a really lagging indicator. The bickering that’s taking place in Washington is undoubtedly having an impact on the consumer psyche — like children listening upstairs while their parents argue in the kitchen, it can’t help but create anxiety and worry.

Paula Rosenblum
Guest
9 years 7 months ago

I agree with the article and with Doug. Consumer confidence has little to do with our spending habits. After all, Americans, in particular, love to consume. And other countries with money seem to enjoy spending it here too.

I think consumer confidence has become an abstraction — sort of “oh dear, my children are in big trouble” more than “I’d better stop spending money.” The stock market has been so erratic it’s hard to take it seriously, and similarly, the political rhetoric has gotten so torqued and twisted that the majority of people just shut it off. The debt ceiling debate was like that. And we know that the crisis in Greece is a problem for someone, but we’re not quite sure who.

David Biernbaum
Guest
9 years 7 months ago

Consumer confidence didn’t seem to be in any type of tizzy when Target’s web site got so jammed up last week for a sale that it stopped working. Consumer confidence is absolutely fine for the overwhelming majority of Americans who are working, earning money, and still want to buy things. What worries me about retailers is that they might over-react (again!) and resort to SKU over-rationalization once again, and stop carrying some of their most exciting and differential items that folks want to buy!

Doron Levy
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Doron Levy
9 years 7 months ago

I like to take confidence figures with a grain of salt. When working with a retailer one on one, I use spends per transaction and the amount of transactions as an indicator of trends. The actual indicators that economists put out is somewhat diluted because of all the data used to compile that number. Consumer psychology can be affected with what is going on at a particular time. Right now, consumers will probably tighten their wallets because of all the bad news coming out of Washington (and President Obama’s recent speech won’t help consumers increase their spending).

Louis Mellet
Guest
Louis Mellet
9 years 7 months ago
It’s quite clear that the impact of the debt debate has had an impact on the consumer in terms of his or her view of the stock market (albeit not as pronounced as I would have thought). The recent retail numbers show, however, how dulled the American consumer has become to macro headline risk; in this respect, consumer spending patterns are, quite frighteningly, lagging significantly behind recently revised GDP projections, in my view. If this is the case, then it follows that consumers have yet to really begin significantly retrenching, which, if this should occur, ultimately begets a downward spiral: S&P earnings are then revised downward, stock prices fall to reflect these new projections, which ultimately leads the consumer to increasingly retrench on spending and, by the way, sell stocks. This is particularly true of the affluent spender, who has proven to be quite resilient in the face of unprecedented macro events. What changes this? Is it the stock market and, if so, at what level do we see marked deterioration in affluent and aspirational… Read more »
ron kurtz
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ron kurtz
9 years 7 months ago

Not sure that “congressional job approval ratings had a ‘significant and meaningful’ impact on changes in consumer confidence” or if the reverse is true.

In either event, consumer confidence ratings reflect close to 100% of the population while half of all consumer spending is done by the wealthiest 10% of US households. It is their confidence levels and security of wealth that will largely influence changes in consumer spending.

Dan Raftery
Guest
9 years 7 months ago

It has been my experience that consumer confidence indicators tend to be forward-looking and sales are of course historical. Retailers have an effect on sales when they interpret the indicators to mean they should reduce future inventories, which in turn can limit sales potential — kind of a slippery spiral.

I think that the debt ceiling debate and all the rest of the political circus acts have beaten down the collective psyche of this country, which is economically reliant on consumerism. We need someone to exhibit clear-headed leadership on the major economic issues, but no one is playing that role — yet another slippery spiral.

Cathy Hotka
Guest
9 years 7 months ago

Americans this year were treated to the appalling spectacle of the Congress refusing to extend the debt ceiling to pay for programs they had already approved. No wonder they’re pessimistic.

Ed Dennis
Guest
Ed Dennis
9 years 7 months ago

Consumer confidence numbers (as always) reflect consumers’ feelings about the future. They have never been an indicator of anything else. If you wonder why sales are holding up or increasing in some areas, you must realize that the economy didn’t get bad yesterday; it’s been bad for over two years, and businesses are (in some cases) cycling weak numbers.

A 4% gain on over a 6% decline isn’t growth. Many corporation have been able to turn this into increased profits by managing overhead, however, it isn’t growth, and while you can manage your way to profits, it is horribly difficult to manage your way to real growth with reduced overhead when it includes reduced compliment. While democrats seem to have a very difficult time understanding this it remains a fact.

Consumer confidence will rebound only when consumers see some real growth in the economy. Manufactured, short term growth that requires increased taxes to pay for it will only further dim the spirits of the American public.

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