Study: Confidence Readings Failing as an Indicator
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."
- Watch What I Do, Not What I Say – Milken Institute
- Consumer confidence improves slightly, but future outlook declines to lowest in 31 years – The Associated Press/The Washington Post
- Congressional Job Approval at 15% – Gallup
- August Retail Sales Remain Flat as Spending Stalls, According to NRF – National Retail Federation
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?