chart tracking volatility of consumer confidence surveys from November 2018 to April 2019

The Irrational Exuberance Of Consumer Confidence Indexes As Economic Indicators

by Richard Cameron


The Consumer Confidence Board released survey numbers for May, which showed an increase in the index from April’s 129.2 to 134.1.  What are these surveys asking, who is being asked and should anyone rely on them for an indication of the economy’s performance in the near term or beyond?

The two main surveys that investors follow are the Consumer Confidence Board – actually conducted by the same people (Nielsen) that estimate TV ratings and the University of Michigan. There are some other surveys that troll these two, one of which is the Survey Monkey poll conducted monthly among a larger pool of respondents – just under 10,000 average. The questions asked by each are nearly indistinguishable. The following, from the University of Michigan, are representative:

1. We are interested in how people are getting along financially these days. Would you say that you (and your family living there) are better off or worse off financially than you were a year ago?
2. Now, looking ahead, do you think that a year from now you (and your family living there) will be better off financially, worse off or just about the same as now?
3. Now turning to business conditions in the country as a whole – do you think that during the next 12 months we’ll have good times financially, bad times, or what?
4. Looking ahead, which would you say is more likely: that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?
5. About the big things people buy for their homes – such as furniture, a refrigerator, stove, television and things like that – generally speaking, do you think now is a good or bad time for people to buy major household items?

Consumer confidence indexes are considered by market analysts as “soft data”. Why soft data? Because they consist of sentiment and opinion, rather than on measurables. If you own stock in one of the major indexes – the Dow, S&P 500, or NASDAQ, for example, should you base your investment activity on consumer surveys?

Looking at the premise of “consumer confidence”, which being that some random group of individuals can reliably predict the overall behavior of consumers, reveals a host of deficits in logic and reason. Let’s examine some of them.

First is the survey respondents assessment of the jobs environment. What informs them of the actual climate as pertains to employment? Almost exclusively, it is the media reporting on the “jobs numbers” produced by the Labor Department’s Bureau Of Labor Statistics. There’s a problem with that. The Labor Department is a captive of the political objectives of any given administration, which leads to concern that the numbers they produce are tweaked to give the president favorable talking points, such as numerous false comments from Donald Trump typified by this:

Donald Trump tweet proclaiming "More people working in USA today than at any time in our history".

What Trump is crowing about are the Labor Department’s “U-3” statistics – the estimated number of individuals unemployed, but actively seeking work. U-3 is misleading due to a handful of factors. One is that it folds in data from each state’s agency that manages unemployment benefits. While the number of people applying for and receiving unemployment benefits may be reliable – these statistics tell us nothing about the number of people who have exhausted their eligibility and are still looking for jobs. It also tells us nothing about underemployment, part time workers and the below the radar screen “gig economy” – that portion of economic activity that is not formally reported in these numbers.

What you won’t hear discussed very often, if ever, is the U-6 statistic. U-6 is, according to Investopia, anyone who has been seeking employment for at least 12 months but left discouraged without being able to secure a job. It also includes anyone who has gone back to school, become disabled, and people who are underemployed or working part-time hours. As you can see, the top line number – U-3, that the media use as a touchstone, is incomplete and more often than not – misleading. But the real picture is even more obscured still.

Another key piece of data is the Labor Force Participation Rate (LFPR). In truly robust economies, the participation rate is relatively high. If perceptions of Trump’s economy were based not on the ongoing growth in the stock market, but instead on how many people are actually in the job market, the picture would be quite dismal. The latest report on the LFPR is not the sort of news Trump would crow about; at 62.8, it matches the lowest level in the past 41 years. However, these are not the sorts of nuances that people responding to a consumer confidence survey would be cognizant of. They only hear the snippets about “the unemployment rate fell to 3.7 percent in May” and then on to other misleading bits of bumper sticker style news reporting.

But what else could be faulty in these consumer confidence reports? One additional glaring problem is the fact that consumers are the last to know their jobs are in jeopardy. We’ve all heard examples of large groups of workers being blindsided by plant closures and layoffs. I personally witnessed one that caused shock and despair at a manufacturing business and the loss and devastation came entirely without warning. Last June, thousands of Sears employees were terminated without warning, but promised severance benefits.

What they didn’t know was that Sears’ CEO Eddie Lambert had been siphoning money out of Sears while planning to plunge it into bankruptcy, which would make any promises of severance money completely fraudulent.

photo of General Motors' Lordstown, Ohio plant which recently closed.

More recently, GM shut down another phase of production at its Lordstown, Ohio plant, which not only added another 1,700 jobs directly to the slate of lost incomes, but caused a ripple effect in related sectors. The Washington Post profiled one employee of a GM subcontractor, Scott Mezzapeso, who lost his $22 per hour job making seats for the Chevy Cruze and now is flipping pizzas at Bruno Bros. Pizza for $11 an hour.

Had Mr. Mezzapeso answered the phone in February this year, he might have told the pollsters all sorts of optimistic scenarios about his personal situation, plans for consumer purchases and about the prospects of the economy writ large. What would he tell them now at the end of May? And – in fact, Mezzapeso told the Post that, “To be 100 percent honest, I thought I would be laid off for a few months and then go back to work.”

That consumers have rosy expectations not supported by anything resembling empirical evidence, is not exactly the sort of calculus anyone should base estimates of economic activity that account for 70 percent of American GDP on. 

In fact, to further illustrate the absurdity of “consumer confidence”, consider the fact that private studies as well as those from the Fed Reserve, show that 78 percent of Americans are living on financial thin ice – that is to say, one unexpected medical expense, a major car repair or any number of other unanticipated fiscal catastrophes away from a personal debt crisis. One we heard of today was the $5,000 item (nitrous oxide) on the hospital bill Carly Ray Kirschneider received for during her second child’s birth.

The Federal Reserve Board in 2017 reported that 44 percent of American households they contacted told surveyors that they could not cover a $400 emergency expense.  Are these same folks – who I am not going to blame for the precarious circumstances, the best prognosticators of economic prospects? No thinking person would agree.

Another dimension to the farce, nay – insanity of ‘consumer confidence’ is income inequality and paltry wage growth which are both features of this so-called “booming economy”. The National Bureau of Economic Research has reported that 90 percent of the wealth in America is held by 1 percent of the population. From 1983 to today, top earners grew their wealth, but all others have lost ground. Simultaneously, wages for the working class are stagnant and the perks of the GOP tax cut have not included them.

Survey Monkey discovered, in the course of polling consumer confidence, this eye-opening contradiction:

More than four in ten people (43 percent) who’ve already filed their 2018 tax returns aren’t sure whether they got a tax cut as a result of the December 2017 tax law (20 percent lean towards thinking they did, and 24 percent lean towards thinking they didn’t). Nearly a quarter (24 percent) say they definitely got a tax cut, and 31 percent say they definitely didn’t.

If the poll respondents don’t understand the impact of the tax cuts that the Trump administration and the president constantly hawk, how can they possibly grasp other economic realities? 

Homelessness is a growing epidemic in America’s major cities, exacerbated by inflated housing costs. Household debt has exploded in recent decades. At present, average household debt is $38,000 – and that figure does not include mortgage obligations or student loans. Collectively, American household debt is estimated at over $13.5 Trillion – up $869 billion from a decade ago. As a percentage of GDP – American debt is pegged at 78.5 percent, whereas by comparison, in China it is at 48 percent and Germany’s is 53 percent.

Rising consumer confidence also seems to indicate shocking ignorance of the economic cloud forming on the horizon. Two of the main engines of the economy – international trade and low cost imported goods, are lined up straight in the crosshairs of Trump’s aggressive and foolhardy trade war.

Economists understand the hazards and the consequences and a record number of them are predicting a recession, if not beginning in 2019, no later than 2020. The tariffs that Donald Trump is so giddy about imposing on our trade partners, actually amounts to a tax on consumers, which will amount to $25 dollars on every $100 spent on a wide variety of commodities. The reality disconnect among respondents to these surveys is staggering.

The markets, at least on Tuesday, seemed to be immune from the cheerful whistling through the graveyard of those polled in the CCI. Instead of a rally, all three indexes plummeted – the Dow giving up 237 points.

So, are these consumer confidence indexes meaningful, predictive data or are they simply a device to con investors into making bad bets on stocks? Based on past history – notably a peak of consumer enthusiasm for stocks in January 2000 and what we know happened a few months later (the DotCom bubble explosion), we conclude it’s the latter, not the former.

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