Consumer Confidence

Here is the headline from today’s edition of CNN/Money:

Confidence hits 5-month low : Job worries push closely watched measure of sentiment lower in March, though it is above forecasts.

NEW YORK (CNN/Money) – Worries about the job market pushed consumer confidence to its lowest level in five months in March, a research group said Tuesday — although its index came in above Wall Street forecasts.

We’ve seen indicators that consumer confidence was low for over a month now, so this is completely unsurprising. But given how low consumer confidence has been for the past year or so, I’ve started wondering about whether consumer confidence readings actually tell us anything useful about where the economy is headed.

The Conference Board’s consumer confidence index comes from tallying the results of a survey of 5,000 randomly selected individuals. A description from their web site follows.

The questions asked to compute the indexes have remained constant throughout the history of the series. The Index is based on responses to 5 questions:

• Respondents appraisal of current business conditions.
  
• Respondents expectations regarding business conditions six months hence.
  
• Respondents appraisal of the current employment conditions.
  
• Respondents expectations regarding employment conditions six months hence.
  
• Respondents expectations regarding their total family income six months hence.
  

For each of the 5 questions, there are three response options: POSITIVE, NEGATIVE and NEUTRAL.

Do these questions actually do a good job of predicting consumer spending? The graph below shows the plot of consumer spending (the orange line, measured in percent shown on the right axis) superimposed on the graph of the consumer confidence rating (the blue line, measured as an index shown on the left axis).

Other than both series being unusually high in the late 1990s, it’s hard to see much of a relationship between the two. Formal econometrics may tease out more of a relationship than casual observation suggests (something that I will leave as an exercise for the reader), but it’s not obvious to me that consumer confidence really does a good job at predicting consumer spending.

Kash