Hello. Thank you for your question, and for your patience while I
worked on this Answer.
Consumer confidence, sometimes also called consumer sentiment, is
commonly described as a leading economic indicator:
"An economic indicator is simply any economic statistic, such as the
unemployment rate, GDP, or the inflation rate, which indicate how well
the economy is doing and how well the economy is going to do in the
future. As shown in the article "How Markets Use Information To Set
Prices" investors use all the information at their disposal to make
decisions. If a set of economic indicators suggest that the economy is
going to do better or worse in the future than they had previously
expected, they may decide to change their investing strategy."
A Beginner's Guide to Economic Indicators
http://economics.about.com/cs/businesscycles/a/economic_ind.htm
Thus, "[t]he Conference Board Consumer Confidence Index, which had
increased in January, declined in February. The Index now stands at
101.7 (1985=100), down from 106.8 in January. The Present Situation
Index rose to 129.3 from 128.8. The Expectations Index, however, fell
to 83.3 from 92.1 last month.
The Consumer Confidence Survey is based on a representative sample of
5,000 U.S. households. The monthly survey is conducted for The
Conference Board by TNS. TNS is the world's largest custom research
company."
http://www.conference-board.org/economics/consumerConfidence.cfm
As to your question, why the Federal Reserve should think that
consumer confidence might make a difference to future prices, output
and employment, Google Scholar is a good place to discover academic
research into the issue.
http://scholar.google.com/scholar?hl=en&lr=&q=%22consumer+confidence%22++indicator++%22federal+reserve%22&as_ylo=2004&as_yhi=2006&btnG=Search&as_subj=bus
http://scholar.google.com/scholar?as_q=consumer+leading+indicator+&num=10&btnG=Search+Scholar&as_epq=federal+reserve&as_oq=&as_eq=&as_occt=any&as_sauthors=&as_publication=&as_ylo=2003&as_yhi=2006&as_allsubj=some&as_subj=bus&hl=en&lr=
"At least since the work of John Maynard Keynes, economists have
pondered the ways in which consumer and investor sentiment?what Keynes
(1936,Chapter 12) referred to as ?animal spirits??might influence the
real economy. Today, the outcome of monthly consumer confidence
surveys provides steady fodder for the business and financial press
and is treated as an important piece of economic information. In the
New York Times alone, more than 15 articles about consumer confidence
and its potential impact on the economy appeared between July 2002 and
June 2003. Consumer confidence is often cited by Federal Reserve
Chairman Alan Greenspan as a key determinant of near-term economic
growth (for example, Greenspan, 2002)."
Consumer Confidence and Consumer Spending
SC Ludvigson - JOURNAL OF ECONOMIC PERSPECTIVES, 2004
www.econ.nyu.edu/user/ludvigsons/JEPconf.pdf
The same article reaches a somewhat fuzzy conclusion:
"Measures of consumer confidence do forecast future changes in labor
earnings and non-stock market wealth, but measures of consumer
attitudes appear to be directly related to future consumption growth,
not just indirectly through their predictive power for household
income or wealth. Carroll, Fuhrer and Wilcox (1994) rule out other
explanations for why sentiment forecasts aggregate spending growth,
including a simple model of habit formation. The question of why
consumer attitudes help predict future consumption growth remains a
puzzle.... Other researchers have explored the relation between
consumer confidence and broader measures of economic activity.
Mishkin (1978) focuses on the interrelation between household
investment and consumer sentiment. Matsusaka and Sbordone (1995) find
a relation between the Michigan Index of Consumer Sentiment and GDP
growth. Of course, the results in these papers and those presented
here raise the question of whether confidence measures serve mainly as
proxies for some other fundamental variable that contributes to
business cycle fluctuations. The difficulty with assessing this
concern is that we don?t know what those other fundamentals might be."
Id. at 20.
Here's another study, looking at the same issue country-by-country:
[the .pdf link didn't work for me, so I've also given you Google's html verions]
http://www.ciret.org/user/jbcma/pdf/2004_2_147-170.pdf
http://64.233.179.104/search?q=cache:spMnzmrkS1wJ:www.ciret.org/user/jbcma/pdf/2004_2_147-170.pdf+%22Consumer+sentiment+and+economic+activity:+a+cross+country+comparison&hl=en&ct=clnk&cd=1
"Consumer confidence indices have some ability to forecast the
evolution of economic activity, provided that both their coincident
nature is taken into account and that a number of data-coherent
parameter restrictions are imposed .... These results appear to be
fairly robust..."
Returning to plain English, it's fair to say that consumer confidence
is a fair indicator of how freely consumers will spend in the future.
So it follows that pricing, output and employment will be affected by
spending.
Please browse through these sources and get back to me, via Request
for Clarification, with anything further you might need. We're not
done here until you're satisfied! I would appreciate it if you would
hold off on rating my answer until I've had a chance to provide any
clarification.
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Sincerely,
Google Answers Researcher
Richard-ga |
