Source: Image of Business cycle created by Kate Eskra
Hi. Welcome to macroeconomics. This is Kate. This tutorial is on consumer confidence. As always, my key terms are in red and examples are in green.
So in this tutorial, we'll talk about what consumer confidence is and how it's used as an economic indicator. You'll understand why consumer confidence is considered a coincident indicator. And finally, we'll talk about why consumer confidence can be a volatile and inconsistent indicator.
So you're used to seeing business cycles. And you know now that economists use a lot of different kinds of data and indicators to help them do a few things. First of all, to help them predict where our economy is headed along that business cycle, but to also help explain what has just occurred in the economy. And finally, to look at what is currently happening right now. Where are we right now on this business cycle?
So assessing consumer confidence is just one way, one indicator, that economists use to help them actually describe what is currently happening. OK. So here's a big long definition for you for what consumer confidence is. And all of these things in this definition are things that we'll talk about.
So the indicator is compiled and assessed by a non-government entity, the Conference Board. And it's a coincident measure. A coincident measure is one that describes what's happening right now. So it's a coincident measure of consumer sentiment with respect to the present situation of the economy and the six month outlook for the economy.
Consumer confidence is highly sensitive to media and marketing influence on consumers' opinion formation. And as a result, it can be volatile and inconsistent over time intervals. And this last part is what we'll talk about at the end of the tutorial.
So as the key term definition there stated, it is measured each month by the Conference Board. The Conference Board is an independent economic research organization. So this is one indicator that's not calculated by the Bureau of Labor Statistics, for example.
What this Conference Board does is they survey 5,000 households. And they ask them to respond either positive, negative, or neutral to questions concerning current conditions and conditions in the next six months. So they have to say how they feel currently and what do you think about these things in the next six months. So they're asked about business conditions, their own personal employment conditions, and their total family income.
So consumer competence can actually tell us a lot about the economy. If consumers are confident, they continue to make purchases, typically speaking. So if you feel good about your own situation and how the economy looks, you probably are going to plan to go on that summer vacation and can continue to eat out at restaurants instead of pinching your pennies and saving for that rainy day.
These kinds of purchases and consumer demand are really important, because that's what keeps our firms profitable. And when firms are profitable, they continue producing. And that means that they retain, if not hire more, employees.
The idea is people with jobs have money to continue spending. So if consumers are, though, even slightly fearful of the future economy, they tend then to save any extra money. They don't book that summer vacation as the opposite of what I had on the previous slide. They eat in more often than dining out.
And this drop-off in spending definitely starts to impact firms. Firms start scaling back on production, perhaps laying off employees, or cutting hours. And again, the opposite is the idea here. People without jobs obviously don't have money to continue spending. And the economy tends to get worse.
So that's how macroeconomists look at consumer confidence and what it's going to say about our economy. So simply put, the idea is when confidence is rising, consumers spend money. And that indicates a healthy economy. When confidence is decreasing, consumers are saving more than they're spending, or they just don't have the money to spend in general. And that can be an indication that the economy is in trouble.
So the key idea, when we feel good about the stability of our incomes, we are more likely to make purchases. Pretty self explanatory, right? So you can access this link, if you want. I included it here for you so that you can look at the most current report.
But this is the report from January 2014. And this is just one general statement from the beginning of it. And it says right here that the Conference Board Consumer Confidence Index, which had rebounded in December, increased again in January.
So the index they're reporting now stands at 80.7, up from 77.5 in December. Really what they did, they set the index to 100 at the first year it was calculated in 1985. So although we're lower than then, we're up from where we were in December 2013. OK. So that's an indication that consumer confidence increased from one month to the next.
So why is consumer confidence a coincident indicator? Really it's pretty straightforward. Consumers are responding to questions about their current attitudes about the economy right now and about their recent or upcoming purchases.
So certainly they're also responding about what they think is going to happen in the six months out from the survey, but they're responding about their current attitudes right now. So there are some issues, though, with consumer confidence. It does tell us some, but there are some problems with it.
It's a very popular indicator that is reported in the media. And that's because it's something viewers can relate to. When you hear about consumer confidence, you think, oh, I'm a part of that. So viewers tend to relate to this indicator.
But really how valuable is it necessarily? Well, consumers we know are influenced very much by the media and by marketing. And so in reality, it's pretty volatile. And sometimes it can be an inconsistent indicator because of this.
So again, I think we've mentioned several times throughout this course, the more educated our people are, the more informed our voters are and our citizens are, that could make for a more consistent consumer confidence. But people are very much influenced by our media reporting. So that's why this can be volatile and inconsistent.
In fact, here's a recent example for you actually to show this. So during a recent government debt ceiling crisis, which was so highly covered in the media-- I mean, it was the only thing you could watch on the news or read about for the time it was occurring.
The Conference Board that month reported a huge decline in consumer confidence. But we found out later on, when it was released, in that exact same month that consumers were apparently reporting this huge decline in confidence, retail sales actually rose 0.4%. So in this example, at least, it turns out that what consumers did was really different from how consumers responded they actually felt about the economy, as reported by the Consumer Confidence Index.
So in this tutorial we talked about what consumer confidence is and how it's used as an economic indicator. Hopefully now you understand why consumer confidence is considered to be a coincident indicator. And finally, we looked at-- because of media influence consumer confidence can sometimes be really inconsistent and volatile when used as an indicator.
Thanks so much for listening. Have a great day.
Terms to Know
Indicator that is compiled and assessed by a non-government entity, the Conference Board. It is a coincident measure of consumer sentiment with respect to the present situation of the economy and the six-month outlook for the economy. Consumer confidence is highly sensitive to media and marketing influence on consumers' opinion formation and as a result, the indicator can be volatile and inconsistent over time intervals.