Sunday, February 20, 2005

Is "Consumer Confidence" Useless?

by Calculated Risk on 2/20/2005 03:19:00 PM

A new study by Dr. Dean Croushore of University of Richmond "says they're essentially useless for forecasting Americans' spending patterns."

Here is the February AP-Ipsos consumer confidence index.

Here is a PDF version of the report "DO CONSUMER CONFIDENCE INDEXES HELP FORECAST CONSUMER SPENDING IN REAL TIME?".

Dr. Dean Croushore said:

"... consumer confidence just reflects the past. You lose your job, your confidence falls. There's not really anything new there. What we really want are indicators that look forward."
However, the response from the leading Consumer confidence Indexes:
Richard T. Curtin, director of the Michigan surveys, said it's more telling to look at consumers' responses to his survey's specific questions rather than the index itself. That's because over the decades, Americans' spending decisions have come to be based on an increasing number of factors, including expectations about interest rates and asset values, he said.

"So the details are much more important than the overall number," Curtin said

Robert H. McGuckin, economic research director for the Conference Board, said in an e-mail he hasn't had the chance to closely examine Croushore's study. But he said the group's researchers have used similar real-time forecasting tests in evaluating their Leading Economic Index, which includes consumer expectations.

"We find the (Leading Economic Index) provides timely and accurate ex-ante information for predicting not only the business cycle turning points but also monthly changes in the economy," he wrote.

McGuckin added that the group's consumer confidence survey "is not designed narrowly to focus just on forecasts of consumer expenditures."