ECONOMIC ANALYSIS: Consumer confidence is tricky economic indicator

January 10, 2005

We've see it on television almost every day, it seems. Within seconds of a dramatic event-winning a race, scoring a touchdown, or finding a lost child-the central figure is asked by an eager reporter, "How do you feel?"

As an economist, I am generally squirming in my chair at this point. Not because economists have no feelings-we actually do even if we tend to express them using graphs and equations. Rather, it is because we believe the best way to gauge our feelings is to observe our actions, not ask us.

Naturally, the actions we study most closely are the buying and selling of things, like goods and services. When we as consumers buy something, especially when it is a high-priced item, it tells a lot about how we feel about our economic status and security, both now and in the near future.

If we're buying peanut butter and jelly or rebuilding the engine for the third time on our 1974 Nova, that says one thing. But if we start going out to eat at expensive restaurants and we take out a loan for a second home, it says another.

How consumers feel about the economy is tremendously important for those in the business of selling things. That's why at least two nationally recognized organizations regularly conduct national surveys to assess consumer confidence.

The results of the Conference Board's survey show a marked jump in consumer confidence for the month of December. Specifically, the index of consumer confidence tallied from results of questions asked in the survey went from 92.6 percent in November to 102.3 percent in December.

In one sense, the meaning of this change couldn't be more straightforward. Consumers are more confident today than they were 30 days ago. We know this because that's what they told us.

It's when you try to translate that confidence into something you can actually see-like buying behavior--that it starts to get tricky. Because the correlation between the monthly gyrations of these confidence indexes, and how and where money is spent, is a lot weaker than you would expect.

The years immediately following the recession of 2001 are a case in point. During this recession, consumer spending never failed to grow, even as the rest of the economy faltered. But there were certainly some quarters that were better than others.

One of the worst, from a consumer confidence perspective, was the fourth quarter of 2001. In the immediate aftermath of 9/11, consumer confidence fell almost 40 percent. Yet in that same quarter, consumer spending grew almost 7 percent, the fastest single-quarter growth spurt in 15 years.

Consumer confidence came roaring back in the early part of 2002, yet consumer spending growth cooled markedly. And as we came into 2003, a year when confidence fell to its post-recession low, consumer spending heated up. Overall, 2003 was a better year for spending and the overall economy, yet confidence then was significantly lower than in the previous year.

Whether it was the Iraq war, the drumbeat of news of weak job growth, or the presidential campaign, people consistently told surveyors they felt worse about the economy than their spending would indicate. That's even more apparent when you consider that spending on things involving long-term financial commitments, like housing, was riding at the head of the pack.

But then economic indicators are a little like economists themselves, I suppose. We don't always agree. Consumer confidence remains one of the most important ingredients to economic growth, no doubt. But the experience of recent years calls into question the best way to measure it.

Barkey is an economist and director of economic and policy studies at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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