What is... | May 13, 2011

What is consumer confidence?

Why do consumer confidence figures trigger strong interest? Every month many countries release figures on consumer confidence. These trigger strong interest as they are seen as indicators of both current and future trends in consumer spending.

Measure for measure
Higher consumer confidence might signal increased activity in the economy – that people are prepared to spend more, take more holidays and borrow money to buy houses and other goods. Lower confidence could mean increased concern about job security and worries about selling property – and suggest a slow down in consumer spending. The European Commission oversees an economic sentiment survey for the 27 countries in the European Union and for the Eurozone based on using a common survey by individual member states. In the United States, the University of Michigan and the Conference Board are among those that run similar surveys.
These surveys typically question a sample of people chosen to represent the general population about conditions in the economy, personal finances and whether they plan to buy large items (such as a car or house renovation). Answers are used to calculate indices of consumer confidence. As these indices have been calculated for years, comparisons can be made between different periods.

Instant barometer
One reason why people pay so much attention to measures of consumer confidence is because they may provide an early signal of actual household spending. Because they are based on surveys, they can be published weeks before the data can be collected from retailers. These indices may give early information both about how consumers are feeling and how they may behave in the near future.
As a result, the surveys may provide information to allow forecasts that can be used by companies and by central banks to set interest rates.

(Not) feelin’ groovy
The European Commission survey for April 2011 showed confidence declined across Europe. The index level for the EU fell by one point to -14 from -13 the previous month. While this was well above the index level of -32 recorded in the March 2009 during the global financial crisis, the measure has been declining since August 2010. But within Europe, there is significant difference in consumer sentiment between countries. 
United Kingdom confidence, for example, in April fell to -24, above the low seen during the global financial crisis but still at a level seen in the recession of the early 1990s. Meanwhile, in Germany the index level in April was +8, which is near the highest level recorded on data going back to 1985. This may reflect the two countries’ different economic outlooks, with the UK seeing sluggish growth against strong year-on-year growth in Germany. 
In the US, the Conference Board Consumer Confidence Index rose in April 2011, continuing an uptrend that has been in place since early 2009. But as the chart (left) shows, the level of the index is still near lows recorded in periods of slow growth in the past.

Strong on current conditions…
There is a keen debate about how useful consumer confidence data actually are. A Federal Reserve Bank of St Louis study found the figures closely tracked the strength of the economy at the time of the survey. It said that an economist “trapped on a desert island” with only consumer confidence data for company would have a good idea about the general strength of an economy.

…weaker on future forecasts
A Richmond Fed study agreed surveys were useful for tracking the business cycle but of less value for forecasting consumer spending. Meanwhile, research for the Philadelphia Fed concluded that indices of consumer confidence were not of significant value in forecasting consumer spending. In fact, in some cases, it said they made the forecasts significantly worse.

Don’t worry, be happy
However a rise in consumer confidence along with improvements in other economic data can be seen as a sign that the economy is on the up. Events such as the Royal Wedding of Prince William in the UK may also put an extra spring into people’s steps. Whether it will lead to greater confidence to spend, only time will tell.


Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics

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