Consumer Confidence and Your Future
The Christian Economist Consumer Confidence and Your Future
By, K. Wayne Hast
Today, we measure just about everything in our economy. If you listen to the financial news, you hear them announce what GDP (gross domestic product) was for a previous quarter or last year. You also learn what the unemployment rate was last month and the number of jobs that were created of lost during that month. These two measurements of economic well-being are only able to see what happened in the past. They only tell us where we have been. They don’t give us information about the future. The most important measurement that provides informative information about our near-term economic future is something named the Consumer Confidence Index.
What is the Consumer Confidence Index?
While it is called an index, this report is actually a monthly poll (conducted through the mail) of approximately 5,000 households (only 70% respond). This poll is conducted by an organization named The Conference Board. (The Conference Board, located in New York City, is a prominent international research organization.) Results are released on a monthly basis. Participants of this poll are asked to respond to (5) questions, that have remained consistent over the life of the survey. The questions ask participants to give their appraisal or expectations about the following:
* Current business conditions
* Business conditions six months hence
* The current employment conditions
* Employment conditions in the next six months
* Their own total family income in the next six months
There are only (3) possible answers the participants can respond with to these questions: positive, negative or neutral. For each question, the Conference Board calculates the proportion of positive answers to the total of positive and negative answers. This proportion is then benchmarked to the average of the same proportions that occurred in the year 1985, which is assigned a CCI value of 100. This benchmarked number is then the value of the headline Consumer Confidence Index for that month.
An extremely strong number would be 140%. (In January, 2000, the CCI number for that month was 144.7). An extremely weak number would be 50%.
The release of the June, 2008 poll results:
Consumer confidence, which had sunk to a 16-year low in May, continued to wither in June, according to the Consumer Confidence Index published Tuesday, June 24, 2008.
The Index in June 208 fell to 50.4, down from 58.1 in May of 2008.
"This month's Consumer Confidence Index is the fifth-lowest reading ever," said Lynn Franco, director of The Conference Board Consumer Research Center. "Consumers' assessment of present-day conditions continues to grow more negative and suggests the economy remains stuck in low gear. Looking ahead, consumers' economic outlook is so bleak that the Expectations Index has reached a new all-time low. Perhaps the silver lining to this otherwise dismal report is that Consumer Confidence may be nearing a bottom."
Those claiming business conditions are "bad" increased to 32.5 percent from 29.7 percent, while those claiming business conditions are "good" declined to 11.5 percent from 13 percent in May. Those saying jobs are "hard to get" increased to 30.5 percent from 28.3 percent in May. Those claiming jobs are "plentiful" declined to 14.1 percent from 16.1 percent.
Damaged consumer confidence is seen as an indication of poor prospects for spending. Consumer spending accounts for two-thirds of the United States' economic activity.
What does this mean to individuals and households in American?
A declining or low index number means that consumers are more likely to reduce spending in the near-future. A consumer less-confident about his prospects is less likely to spend more, especially on big-ticket items. A consumer confident about his prospects will therefore spend more, especially on big-ticket items. Confidence, what John Maynard Keynes called 'animal spirits', drives both spending and investment.
A declining index number from a high level such as 140 percent is not unexpected and probably means very little. A declining index number from record lows however, does say quite a bit about the perceived state of the economy.
We are at a crossroads in our nation today. We have seen home values decline nationally over the past two plus years, and have experienced increasing oil and gasoline prices over the past several months. Saving rates in the US have risen slightly form the lows of zero percent (or below) for a decade or even longer. Even households that annually earn in the six-figures are often living paycheck to paycheck. We still have record consumer debt. The US consumer is seeing the need to change their spending habits. That means spending less and the paying down of credit card and other consumer debts.
Why is this important?
Economists understand that debt acts like a tax on the future. Your ability to spend, save and invest in the future is impacted by the debt that you have build up in the past. The act of borrowing to buy today means less ability to spend in the future. The American consumer may have to work for the next few years to pay for all that was bought on easy credit in the past. Neither governments nor individuals can spend more that they earn forever.
