'Consumer confidence' defies easy measure

Some economists have been pulling their hair out lately trying to predict whether the US economy is sinking into a recession. And traditional measurements are sending mixed signals.

In January, the number of new jobs increased. Consumer spending rose 0.7 percent. Even auto sales gained. Yet consumer confidence appeared to be - and still appears to be - on the skids.

Why the seeming disconnect between how consumers are behaving and how other data indicates they're thinking?

Economists like to probe the consumer psyche. The monthly consumer-confidence indexes they produce are not scientific - they measure confidence, after all, not widgets. But economists insist the indexes offer an invaluable peek at whether average buyers are tightening - or planning to tighten - their pursestrings.

Still, some observers are taking a closer look at what the influential indexes really indicate - specifically, whether they reflect consumer attitudes that exaggerate economic worries and downplay the relative optimism displayed in actual buying behavior.

The most influential consumer-confidence polls are conducted by the Conference Board, an independent business research group in New York City, and the University of Michigan.

The Conference Board's consumer confidence index (CCI) for January fell more than 14 points to 114.4 - its lowest total since 1996. And the University of Michigan's January index of consumer sentiment (ICS) continued a six-month decline, falling to 94.7 - a 4-point slide. Both have been cited as evidence of recession. February's CSI figures are due out tomorrow, and the ICS results Friday.

Negative answers to the "expectation" questions in the two January studies prompted the decline in the indexes. Survey participants were generally positive or neutral, however, about their current economic status.

The Michigan study asks families two questions about the here and now: 'Are you doing better than you did a year ago?' And 'Will the coming year be a good time to purchase large household products?'

According to Richard Curtin, director of the study, the big drop in confidence wasn't rooted in apprehension about the present day. "There's a concern that the slowing economy could affect future job and income prospects," says Mr. Curtin.

"The drop was basically driven by a sharp decline in expectations," says Lynn Franco, director of the consumer research center at the Conference Board. "And when consumers are feeling apprehensive about the future, they're likely to postpone major purchases."

The studies did predict recessions that hit the US in the early 1980s and '90s. Yet some economists are leery of relying too heavily on them. They believe the surveys are weighted on fleeting perceptions. Recent media coverage of plunging dotcom stocks and planned workforce reductions at big-name companies could, they suggest, exert an inordinate influence on consumer perceptions, particularly in an era when media coverage of business and technology is at an all-time high.

"The news is broadcasting national economic problems to everyone at a much greater degree," says Louis Crandall, chief economist at Wrightson Associates, an economic research firm in New York. "Many of the layoffs we've seen will be spread out over years. However, the announcements have a very real impact when they scroll across the screen during the evening news."

Phoenix native Fred Hoss, interviewed while browsing through a Boston mall, thinks talk of a recession is overblown. "The media and government try to scare everybody," says Mr. Hoss. "I see houses going up all over Phoenix."

Media coverage of the stock market is widespread. That attention might be warranted, given that 50 percent of all US households own stock or mutual funds.

"We're in one of these strange periods when the stock market is driving the economy," says A. Gary Shilling, an economic consultant in Springfield, N.J. "Consumer spending is riding on the appreciation of stocks."

Riding stock-market tickers and other economic data too closely, Mr. Shilling and others say, can spur an odd cycle.

"We did a study on [the two indexes] a few years ago and couldn't find any predictability in either one," says Shilling. "With widespread stock ownership ... these numbers may for the first time have a self-reinforcing effect."

Ms. Franco of the Conference Board concedes that an abundance of negative news can influence behavior. She is quick to point out, however, that the CCI specifically asks those surveyed to base their answers on concrete observations.

"We're asking them to ... take a look at conditions in their own community and workplace," says Franco. "Are they cutting back on travel expenditures, working overtime? All of these factors contribute." Arriving at a key statistic

Consumer confidence isn't a scientific measurement, but economists use a procedure to quantify it.

Each month, about 3,500 preselected families answer a survey by the independent Conference Board, which asks them to rate as positive, negative, or neutral their own economic situation, the state of the economy, and the future prospects for both, among other questions. The University of Michigan conducts 500 phone interviews with representative families, using similar questions. All the answers are weighted equally. The economists add up the positive answers and divide by the negative - using 100 as a base figure. A final result of 100 would indicate an equal number of positive and negative answers. (Or, perhaps, all neutral answers.)

A number below 100 would indicate consumers feel pessimistic about the economy. The Conference Board's historic high was 144.7 in January and May 2000. The low was 43.2 in December 1974.

(c) Copyright 2001. The Christian Science Publishing Society

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