Analysis
Consumer confidence surveys are generally coincident indicators of the economy, rather than leading indicators:
- Conference Board readings. For example, in the business cycles of the mid-1970s to early-1980s, the Conference Board survey peaked at 116.1 in December 1972 and plunged to 43.2 in December 1974, before rebounding to 72.2 six months later. The Conference Board index was at 92.3 when former Federal Reserve Chairman Paul Volcker announced his anti-inflation policy in October 1979, and fell to 50.1 seven months later as the economy dipped into recession. The 2007-09 recession saw the index fall from 105.6 in August 2007 to a trough of 25.0 in February 2009. It rebounded to a peak of 72.0 in February 2011, but then dropped back to 39.8 this October.
- Michigan survey. The University of Michigan survey has followed similar patterns. It was at 62.1 when Volcker made his October 1979 announcement and fell to 51.7 during the subsequent recession. It rallied to 76.7 in late 1980, but then fell back to 62.0 in March 1982. In the recent downturn, the Michigan index fell from 75.5 in late 2007 to a trough of 56.3 in February 2009. It rebounded to 77.5 in February 2011 and then slumped to 60.9 this October.
_
Consumer confidence surveys are generally coincident, not leading, economic indicators
Confidence indicators are influenced by a variety of factors, including employment conditions, oil prices, the stock market, and events in Washington. Critically, some of these events correspond with the business cycle, while others are temporary blips.
Unemployment and confidence
The percentage of the unemployed seeking work has one of the strongest inverse correlations with confidence indices. In the business cycle of the mid-1970s, this number rose from 4.7% in late 1973 to a peak of 9.1% in June 1975 and then fell back to 7.7% in late 1976. In the next downturn, it rose from 5.9% in late 1979 to 10.8% in November 1982 before easing back to 7.2% in November 1984.
In the recent recession, the percentage of unemployed people seeking work rose from 5.0% in January 2008 to a peak of 10.1% in October 2009. The number then declined to 8.9% in February 2011 before edging back up to 9.1% -- and softening to 9.0% last month.
Political events and confidence
The debate in Washington this summer about the increase in the debt ceiling had a very adverse impact on both consumer and business confidence. Although there was never a significant chance that the United States would renege -- even temporarily -- on its obligations, surveys indicated that political wrangling about whether the Treasury might 'voluntarily' default on its debt left everyone dissatisfied with the performance of the nation's political leadership. The volatility of the equity market then magnified these negative perceptions (see UNITED STATES: Fears of new recession are overdone - August 30, 2011).
Business sentiment mirrored the decline in household confidence. The September Conference Board survey of CEOs indicated that only 19% expected an improvement in economic conditions compared to 43% during the second quarter. The Business Roundtable's survey of the CEO economic outlook index also fell to 77.6 during the third quarter from 113.0 during the first quarter.
Resilient spending despite low confidence?
_
There is a major gap in confidence between wealthy consumers and those less well off
One of the best explanations for why consumer spending has remained resilient in the face of weak confidence surveys is the gap between high-income and low-income people in survey responses. According to the Conference Board, wealthy people are far more upbeat about the economy than low-income people:
- Their optimism has been buoyed by the large rally in the equity market since March 2009.
- It also reflects the fact that the unemployment rate for college graduates is 4.5% compared to 15.4% for high school dropouts.
- Stores that cater to high-income people, such as Tiffany's and Nieman Marcus, have enjoyed double-digit sales growth during the past year, while retailers catering to people in lower socioeconomic strata, such as Walmart, have seen mediocre sales gains.
- This divergence is also apparent in relative equity market performance; companies that offer luxury products have experienced stock market gains exceeding 400% since the market trough in early 2009, compared to only 80% for ordinary retailers.
Outlook
Confidence will recover in November and December, as long as the euro-area crisis does not reach a critical stage. As in previous months, the gains will probably be larger for high income people than for other groups (see PROSPECTS 2012: US economy - November 8, 2011; and see UNITED STATES: Surging 'wealth gap' to hit growth - August 4, 2011).
Political, not economic, leading indicator?
Confidence indicators could be a more useful guide to the outcome of the November 2012 presidential election than they are to turns in the economic cycle. Confidence readings predicted former President Ronald Reagan's re-election in 1984 and former President George HW Bush's defeat in 1992. If the consumer sentiment indicators fail to rally from their current depressed levels, they could also highlight an economic environment that will make it difficult for President Barack Obama to win re-election. Therefore, political analysts will play close attention to the confidence surveys during the next twelve months, even if economists regard them only as coincident indicators of the economy.
