We hear about it constantly. Famed for it being a leading indicator of economic prosperity, a weather vane on the roof of our national wallet. But is it really the gold standard, best measure ever, metrics by which all other metrics should be judged? As a journalist who has spent years dissecting economic trends, I've come to believe that while consumer confidence certainly holds weight, its significance can be easily overstated, and its signals often misinterpreted.
The conventional wisdom is straightforward: confident consumers spend more, driving economic growth. This seems to make sense intuitively. When consumers are confident in their jobs, wages and prospects for the future, they tend to be more willing to spend. After all, consumer spending makes up a huge chunk of the economy. When confidence is low, it is usually a precursor to an economic recession. This decrease in faith provokes fear, causing people to spend less, which in turn hurts the economy.
This narrative, as appealing as it sounds, misses a few key details. The Consumer Confidence Index (CCI), often cited as the gold standard for measuring sentiment, is based on surveys asking consumers about their perceptions of current business conditions and their expectations for the future. The catch though? Perceptions are not always based in fact.
Just look at the stock market. To do so, it can fly at stratospheric altitudes, even when economic fundamentals are not a terra firma. As many of us have learned the hard way, such times breed a feeling of affluence and hope. In doing so, consumer confidence soars, despite the collapse of job growth or wages falling behind inflation. I think back to just a few years ago when the market was booming. Speculative investments in newly minted tech billionaires fueled that boom. Everyone I knew was bragging about their stock market gains, consumer confidence was through the roof. Deep down, almost every industry was feeling the pain, and that rising tide was failing to lift a lot of boats.
Consumer confidence is volatile and fickle, often changing with national headlines. All too often these factors are only tenuously related to the actual state of the economy. Political activity, natural disasters, even media attention can have a dramatic impact on sentiment. An unexpectedly harsh news cycle could still send confidence crashing, even in the face of a reasonable economic outlook. I’ve seen this happen time and again. This is because a big news event, regardless of its true economic impact, usually sends shudders through consumer confidence.
First, basing so much of the job market’s fate on consumer confidence as a leading indicator is running headlong into the increased complexity of the contemporary economy. The gig economy is alive and well with the worldwide shift towards more flexibility and autonomy in the workforce. Simultaneously, automation is worsening and the gap between the rich and the poor is growing, creating a jarring and chaotic economic environment. In that type of complex, dynamic environment, one over-simplified number such as the CCI just won’t cut it.
Consider, for instance, the effect of e-commerce. It certainly drives new consumer spending. It does so by siphoning funds from local main streets’ mom-and-pop shops, hurting small businesses and local job creation in the process. This complicated impact is infrequently captured in aggregated consumer confidence indexes. That said, I’ve experienced the challenges facing local businesses in my own community first hand. The result is slowdowns even when consumer confidence is seemingly through the roof. The impact for consumers is a powerful convenience with online retail. It has wreaked havoc on small businesses, something that’s largely obscured by macro-economic statistics.
Further still, the notion that less consumer spending instantly equals recession is an incomplete assumption at best, and a dangerous miscalculation at worst. In times of economic uncertainty, consumers almost instinctively choose to increase their savings. This policy decision has the potential to shore up our financial system and build a cushion against inevitable future shocks. Or, they could use these to pay down debt. Not only does this strategy lower near-term outlays, it improves their longer-term fiscal health, making them less vulnerable to future economic shocks.
If that’s not it, then what is the alternative? Of course we shouldn’t overlook consumer confidence. Of course not. When it comes to climate, it still has a hugely valuable piece of the puzzle. It’s important to understand the bigger picture here. Put it in the context of the overall economy, like employment numbers, inflation, and business investment. Let’s not take the easy bait on these big issues. We can’t shy away from a more nuanced understanding of what drives our economic prosperity.
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From my personal experience, economic resilience is best achieved when we encourage financial literacy and responsible spending and saving practices. Instead of responding erratically to consumer sentiment, we should invest in the strategies that will yield long-term growth and success. Together, we hope to create an economy that doesn’t just survive the next turn of electoral fortune. We need to make sure we’re rooting it in good fundamentals. It’s past time to see through the confidence mirage and investments in the things that really drive economic prosperity. The economy is just too complicated, too dynamic for a broad confidence index to capture. To create effective solutions and strategies, we require a more comprehensive and nuanced understanding of these dynamics.
