On consumer confidence <<AG also knows that 'so called consumer cofidence is a lagging indicator not a forward looking indicator and a important one too , what you see in today's number was the 'light that left the sun 9 minutes and some second back', a NAZ that has been dropping for so long and 'consumers' who have been losing money in these treacherous markets have low confidence but once markets stabilise and meny and credits get better this number would reflect very different picture, the market future prospects are based on that new evolving picture not the old,>>..
Message #36537 from IQBAL LATIF at Jan 30, 2001 12:07 PM
Why it is a lagging indicator, a great article from dismal scientest, again underlying the deductions we made soon after the consumer confidence result..
<<Confidence and Contractions
By Sophia Koropeckyj
01/30/01 8:30 AM ET
Consumer confidence has been attracting considerable attention in recent months, both as a validation of slowing activity and as a predictor of near-term events, particularly consumer spending. Looking at trends in consumer confidence for the past thirty years compared to changes in Gross Domestic Product, the best measure of economic activity, three things are clear. First, consumer confidence cannot be considered a leading indicator of changes in GDP. When GDP starts to weaken, so does consumer confidence. Moreover, consumer confidence typically begins to erode well before the onset of a recession (defined as two periods of declining GDP). Second, based on the values through the end of 2000 and historical precedent, the recent decline has not been steep enough to signal the beginning of a recession. However, the recent decline is consistent with eroding confidence leading up to a recession. Third, once consumer confidence hits bottom it takes a long time to recover: consumers react to deteriorating conditions with considerable alacrity. It takes much more time to accept that conditions are improving.
So, how is consumer confidence measured anyway? The Conference Board mails questionnaires to a nationwide representative sample of 5,000 households. About 3,500 households respond. Consumers are asked five questions: (1) a rating of current business conditions in the household's area, (2) a rating of expected business conditions six months hence, (3) current job availability in the area, (4) expected job availability in six months, and (5) expected family income in six months. For each question, households have three possible response choices: positive, neutral and negative. The number of "positive" responses is divided by the sum of "positive and negative" to get a value and then an index is created based on the 1985 annual value.
The composite consumer confidence index is the average of the five indexes. A present situation index is created by averaging the indexes of the responses to questions 1 and 3, while an expectations' index is the average of the indexes for responses to the remaining questions. Indexes for the present and future economic situations are calculated for each of the nine Census divisions. Data are collected roughly during the first half of a month for release at the end of the month. Therefore, the index is a very timely gauge. In contrast, GDP data are released a month after the end of a quarter.
Consumer confidence soared to unprecedented heights in recent years, fueled by the soaring stock market, the tight labor market, strong income growth and low inflation. The high level of confidence has been behind an almost equally unprecedented spending bonanza. Now, many of the factors that supported confidence are unraveling. During the fourth quarter of 2000, confidence fell by 7% and was off by 11% from the peak reached in May. Bear in mind that this peak is not only a cyclical peak, but also a record for the gauge.
During the past three recessions (1974-75, 1980-82 and 1990-91), consumer confidence began to erode up to two years before the economy actually went into a recession, and it continued to fall during the recessionary period. From its highest point to its lowest point, confidence fell by 63% between 1972 and 1974; by 49% between 1978 and 1980; and by 48% between 1988 and 1990. Confidence consistently declines as GDP growth weakens, in line with a weakening in GDP. Therefore, it cannot be considered a leading indicator. However, because of its early release, we have some information about the economic conditions for which data will not be available for another month at least.
While the extent of decline in consumer confidence that occurred during the second half of 2000 is not consistent with the severity of decline that occurs during a recession, it is not inconsistent with erosion in confidence that typically occurs during a slowdown leading up to a recession. Prior to the 1974-75 recession, confidence fell by 20%; prior to the 1980-82 recession, by 22% and prior to the 1990-91 recession, by 10%. Therefore, given the moderate decline during the fourth quarter of 2000, we can surmise that the economy was certainly weakening but not in a recession.
Comparing spending behavior prior to a recession with consumer confidence trends, we find that confidence begins to weaken slightly some months before spending behavior slackens off. This pattern was evident during 1979 and the first half of 1990. For the most part, however, spending behavior and weakening in consumer confidence occur contemporaneously.
Confidence will certainly flag when GDP growth decelerates, but eroding consumer confidence does not necessarily mean that we are heading into a recession. Consumers may react sharply to economic events, but these events are not always significant enough to lead the economy into a recession. For example, from 1985 to 1986, confidence fell by 13% as oil prices collapsed, but the economy was sufficiently resilient to avoid a recession (though GDP did slow). Similarly, the Asian financial crisis rattled confidence, which fell by more than 10%, but again, the U.S. turned out to benefit from the crisis and no recession ensued. Therefore, the falling confidence during the second half of 2000 reflects the weakening economy (engineered by the Fed's course of higher interest rates), but taken by itself is not a cause for alarm nor does it necessarily presage a recession.
While consumer confidence falls quickly once economic activity weakens, it is not a symmetrical relationship. In the event of an upturn, consumer confidence can be considered a lagging indicator; consumers remain wary for quite a while. For example, following the 1990-91 recession, consumer confidence did not begin to recover convincingly until 1994.
In sum, there is little doubt that the economy is slowing and consumer confidence is dutifully tracking the trend. There is little evidence that consumer confidence can be considered a leading indicator. Further, there is little doubt that consumers are now more cautious about opening up their purses than they were a year ago as a result. Consumer confidence is expected to fall to about 120 this year from the December 2000 value of 128 assuming the economy successfully accomplishes a soft landing. This is still considerable distance from an index value of roughly 80 that would be consistent with a downturn of the severity of the 1990-91 recession. >> |
