IDEX Online Research: Consumer Confidence is An Erratic Predictor

Shop till you drop - but first deny it to the pollsters Photo: Chor Ip

(IDEX Online News) - The monthly Consumer Confidence Index is a lagging indicator. That’s probably news to many people, but seasoned economists have known this for ages.

Each month, the Consumer Confidence Index is published by the non-profit Conference Board. The University of Michigan also publishes a Consumer Sentiment Index.

The mass media, the stock market and other “authorities” often read too much into the Consumer Confidence Index. Roughly 40 percent of the questions relate to current household conditions among consumers, while 60 percent of the questions relate to their plans.

Logic would suggest that the Consumer Confidence Index would be a good predictor of retail sales and consumer spending.

Unfortunately, the index is a “hit-or-miss” indicator. Sometimes it accurately predicts consumer spending; other times, it is completely wrong. Thus, most economists use it as a “lagging” economic indicator with a small weighting in their economic forecasts.

There are two key reasons Why the Index IS wrong from time to time:

·                    When the Consumer Confidence pollsters call consumers, most people prefer to give politically correct answers. So, if the country is in a recession, it is politically correct to say that you are cutting back on spending, if for no other reason than you are sympathetic with your neighbor’s unemployment plight. What happens next is interesting: consumers, because they gave a virtuous answer to the pollster, will reward themselves with a trip to the local shopping mall.

·                    In America, there is an old adage: “When the going gets tough, the tough go shopping.” Like the Consumer Confidence Index, sometimes this adage is invoked by consumers, and sometimes it isn’t. You just never know, until well after the fact.

And this is why IDEX Online Research rarely refers to the Consumer Confidence Index.