Get Out Much? The Economics of Consumer Confidence

While no one seems inclined to belt out a stirring rendition of "Happy Days Are Here Again," there are so many positive indicators of economic performance that some observers are stymied by the seemingly immovable  consumer confidence data.

Consumer confidence is a measure of the degree of public optimism about the state of the economy. It was arguably the first widely accepted intangible measure of economic performance which means it was based on related measures - like retail sales - not on direct balance sheet, income statement or national accounts numbers. It has always had a bit of an air of mystery about it: what the heck is 'confidence' anyway - and how do you define or measure it?

Parsing confidence metrics and their veracity or credibility can quickly move from the statistical to the ideological and then leap to the theological. Feelings are strong, data is arguable - and it is not always comparable. But the strength of the measure persists because it is so dependent on observable phenomena, it has proven to relatively reliable over the years and because, despite their public skepticism, every enterprise wishes to know the future, especially when there are sales, profits, bonuses and, in the public realm, votes at stake.

So when superficial measures of economic activity like the upward trajectory of the stock market, increases in home sales and luxury purchases look relatively robust, the failure of consumer confidence to follow suit causes unease. This is, at some level, an indication of the measure's power: despite the vocal avowals of support for tangible metrics, attention paid to the confidence numbers suggests that there is a gnawing concern that the supposedly 'hard' numbers are incomplete. This disquiet reinforces the importance of context and interpretation.

Under current circumstances, as the following article explains, the unemployment and stock market trends are belied by lower labor force participation and reduced levels in the investing public. What these may portend is a reduced level of trust in the efficacy, fairness and broad-based potential of corporate strategies, public policies and regulatory oversight allegedly designed to benefit all citizens. JL

Spencer Jakab comments in the Wall Street Journal:

Confidence, unlike measures of output or earnings, is intangible and consumers often fail to respond the way forecasters expect.

Investors who slice and dice every economic and financial statistic under the sun are on shaky ground when it comes to one of the most important factors.

One would think, for example, that an economy in its fifth year of expansion and predicted to accelerate next year would have sentiment somewhere above average. But the closely watched Consumer Confidence Index, released by the Conference Board, fell to a seven-month low in November. Economists polled by The Wall Street Journal have higher hopes for December, a rebound to 76.5. That still is fairly tepid given a base of 100 in 1985.

Economists puzzled by this may need to get out more. Indicators such as the unemployment rate show the strongest labor market in five years, but it is being flattered by an extremely low level of labor force participation. A housing recovery and record stock prices also are positives, but the rate of homeownership is at a 17-year low. And individual investors have only recently become net contributors to stock funds again.

At the moment, a narrow base of wealthy investors is benefiting disproportionately from rising stock and home prices. If recent trends continue, though, a broader swath of the population should begin to feel the positive effects.

With data going back to the late 1960s, including periods with even lower homeownership and individual-investor activity, the Consumer Confidence Index still shows peaks and troughs that coincided closely with those markets. Examples of the former are January 2000 and April 2006. Lows came in April 2009, October 2002, December 1974 and January 1980.

Recent public fascination with glamour stocks and "hot" initial public offerings may indicate a stronger connection between the stock market and the public mood. The number of offerings and their multiple of price to sales this year have been the highest since 2000.

That brings up a quandary with consumer-confidence data, separating cause and effect. If prior trends hold, investors seeking to get a handle on consumer confidence probably need insight into future asset prices. If they knew that, though, they wouldn't have to parse economic data.