A Crisis of Confidence

Why Consumer Confidence deserves much less attention

By Doug Stephens

To say things have changed since 1967 is an understatement.  Much of the technology we take for granted today was merely science fiction then.  National economies, once bounded and distinct from one another are now inextricably connected and mutually reliant causing economic reverberations to travel at light speed from one continent to another. Companies performed with the long-term in mind and employment within them could be life-long.  The world was a very different place.

All this begs the question, why are we still relying on the anachronistic Consumer Confidence Index, developed 45 years ago, as our primary gauge of consumer sentiment and predictor of consumptive behavior?

What is the CCI?

The Consumer Confidence Index was first implemented in 1967 by the Conference Board, to measure the consumer’s outlook and comfort with  spending their money.  Today, it’s benchmarked to the year 1985, which was chosen as the baseline year for its relative stability compared to other years – it was neither a peak nor a trough economically.  Each month a sample group of 5000 households are asked 5 very general questions to see how they feel about their economic situation.  The current analysis – how they feel today –  makes up 40% of the index. How they feel about their future prospects make up the remaining 60%.  So, in a sense, the CCI designed to be both a lagging and a leading indicator of the health of the consumer economy and the extent to which we, as consumers, are likely to spend.

Not surprisingly, a tremendous amount of financial activity, stock trading volume and business investment strategy hinges on the monthly results of the index, which lately have resembled the ups and downs of an echocardiogram, as consumers struggle to truly understand their economic situation and future.

 A Stone Tool in A Bronze Age

When the index was conceived in the late 1960’s it would have been infinitely easier for the average consumer to gauge their financial stability and job security. Foreign influences on our economy were fewer.  Disruptive technology moved more slowly.  And for much of the last 50 years, business cycles were longer and less turbulent – due in large part to the flattening influence of government intervention and monetary policy.

Today, most experts agree that business cycles are shortening dramatically.   The ability of government to control swings with the kind of artificial stimulus that was prevalent from the 1980’s to the mid 2000’s has now all but dried up.   We are now at the mercy of the wind, so to speak. The result is likely more turbulent and decidedly unpredictable economic cycles.  Corporate outlooks are shorter-term.   The notion of employer/employee loyalty has become nostalgic.  And technology can sideswipe businesses and even entire industries without them ever seeing it coming.

So, if the world’s great economists can’t agree on what’s happening – much less what’s going to happen, is it logical that the average consumer can do any better?  And with a full 60% of the index’s value based on consumer prognostication, it seems virtually engineered for inaccuracy.

With nothing to replace it we can expect to live with the Consumer Confidence Index for the foreseeable future but given its inherently archaic premise, perhaps we should be giving it a lot less air time.