What would Heisenberg say about measuring consumer confidence?
Posted by nithi.vivatrat on March 2, 2009
Two key indicators were issued last week - the S&P/Case-Shiller national home price index and the Conference Board’s Consumer Confidence Index. Both appear grim. The S&P/Case-Shiller index set a new record for the largest one-year drop in its 21-year history, dipping 18.5% over the 12 months ending in December 2008. The Consumer Confidence Index fell to an all-time low to 25.0 (1985=100), plummeting from 37.4 in January.
The Case-Shiller national home price index measures changes in home prices in 20 major cities including Washington D.C., New York, Los Angeles and Dallas. Yes, a one-year drop of that magnitude sounds terrible. I would make this point, however: we have to come out of the housing bubble somehow and this process involves some negative numbers. The sooner we hit bottom in the housing market, the sooner you’ll hear news stories about home prices going back up. Why doesn’t the press emphasize that reassuring point?
As to the Consumer Confidence Index, the Conference Board points out in this morning’s press release:
Consumers’ appraisal of overall current conditions, which was already bleak, worsened further. Those claiming business conditions are “bad” rose to 51.1 percent from 47.9 percent, while those saying business conditions are “good” edged up to 6.8 percent from 6.5 percent last month. Consumers’ assessment of the labor market turned considerably more pessimistic in February. Those saying jobs are “hard to get” increased to 47.8 percent from 41.1 percent in January, while those stating jobs are “plentiful” fell to 4.4 percent from 7.1 percent.
Overall, this index is at 25 (1985=100), down 12.4 points from January.
With the doom-and-gloom tenor of the so-called economic news, is it any surprise that confidence in our government and institutions is at a historic low? I think there’s a legitimate question to be asked here: with so much sensational press coverage of the latest changes in economic indicators, is it possible that the news itself affects the economic indicators?
Let’s consider consumer confidence and, let’s say, the unemployment rate in pseudo-mathematical terms: these variables are NOT separate, independent variables, but are in fact related variables dependent to some extent on each other. My logic: the lower the unemployment rate, the higher consumer confidence will generally be. Likewise (but less obvious), the lower consumer confidence is, the higher the unemployment rate will likely be (lower consumer confidence means lower spending; lower spending means lower economic activity in general; lower economic activity means companies hire less people, meaning higher unemployment).
To be clear, the Consumer Confidence Index is just a poll of 5000 households, with the average indexed back to the 1985 results. This Index, though, do have the potential to move markets — if you don’t believe me, see this research report by the Federal Reserve Bank of New York. Confidence begets further confidence (isn’t that partially the rationale behind the stimulus plan?); likewise, all of this incessant news of apparent “national lack of confidence” can only undermine confidence.
To me, measuring consumer confidence as some sort of objective economic indicator is a tricky, ethereal thing. It strikes me as a somewhat psychoanalytical question (”But how do you feel about it?”) versus an objective measure (are feelings not by definition subjective?).
I’m not saying that the indicators are undeserving of coverage — of course these are legitimate news stories. I am just advocating that we all remember the circular nature of largely psychological phenomena — and to collectively take a breath.