by Doug Short and Steven Hansen
The January 2012 Conference Board Consumer Confidence Index gave back some of its recent gains falling from last months 64.8 (revised from 64.5) to 61.1. The market expected this index to rise to 67.0.
This index remains in territory associated with past recessions – however, it remains at values higher than those seen for most of the second half of 2011.
Here is an excerpt from the Conference Board report.
Says Lynn Franco, Director of The Conference Board Consumer Research Center: “Consumer Confidence retreated in January, after large back-to-back gains in the final two months of 2011. Consumers’ assessment of current business and labor market conditions turned more downbeat and is back to November 2011 levels. Regarding the short-term outlook, consumers are more upbeat about employment, but less optimistic about business conditions and their income prospects. Recent increases in gasoline prices may have consumers feeling a little less confident this month.”
Consumers’ appraisal of current conditions was less favorable in January. Those claiming business conditions are “good” decreased to 13.3 percent from 16.3 percent, while those stating business conditions are “bad” increased to 38.7 percent from 33.5 percent. Consumers’ assessment of the labor market was also less positive. Those saying jobs are “plentiful” decreased to 6.1 percent from 6.6 percent, while those claiming jobs are “hard to get” increased to 43.5 percent from 41.6 percent.
Consumers’ short-term outlook was slightly weaker than it was last month. The proportion of consumers anticipating business conditions to improve over the next six months decreased to 16.6 percent from 16.8 percent, while those expecting business conditions will worsen increased to 15.1 percent from 13.4 percent. Consumers’ outlook for the labor market, however, was moderately more favorable. Those expecting more jobs in the months ahead increased to 16.2 percent from 14.0 percent, while those anticipating fewer jobs declined to 19.5 percent from 20.2 percent. The proportion of consumers expecting an increase in their incomes declined to 13.8 percent from 16.3 percent.
The Sobering Historical Context
Let’s take a step back and put Lynn Franco’s interpretation in a larger perspective. The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it is well below the 69.4 average confidence level of recessionary months a full 32 months after the end of the Great Recession (based on the official call of the National Bureau of Economic Research).
The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator. Statisticians may assign little significance to a regression through this sort of data. But the slope clearly resembles the regression trend for real GDP shown below, and it is probably a more revealing gauge of relative confidence than the 1985 level of 100 that the Conference Board cites as a point of reference. Today’s reading of 61.1 is dramatically below the 81.3 of the current regression level (24.9% below, to be precise).
It is interesting that the consumer confidence pattern of the past 32 months following the NBER declared end to the recession is similar to the 36-month pattern following the 1990-1991 recession, although the current pattern has so far been at a lower confidence level. At an even higher level, there was also a two year period following the 2001 recession where confidence lagged. A common factor in all three cases is a “jobless recovery”. To great extent Consumer Confidence is a proxy for unemployment problems. The rise in confidence in recent months is is concurrent with an improvement in the monthly unemployment numbers, although the January confidence report runs counter to the trend.
On a percentile basis, the latest reading is at the 15th percentile of all the monthly readings since the start of the monthly data series in June 1977 and at the 11th percentile of non-recessionary months.
For an additional perspective on consumer attitudes, see a post on the most recent Reuters/University of Michigan Consumer Sentiment Index. Here is the chart from that post.
And finally, let’s take a look at the correlation between consumer confidence and small business sentiment, the latter by way of the National Federation of Independent Business (NFIB) Small Business Optimism Index. As the chart illustrates, the two have been closely correlated since the onset of the Financial Crisis.
The NFIB index has been less volatile than the Conference Board Consumer Confidence Index, but it has likewise remained depressed despite the official end to the recession in June 2009.
Caveats in Using the Conference Board’s Consumer Confidence Index
According to Bloomberg, the following caveat is provided when reviewing this series:
The underlying series for ”planned purchases” (autos, homes, and major appliances) and ”vacation intentions” showed larger increases in November 2010 levels, primarily due to sample design differences. These level shifts will be treated as breaks, and there will be no historial revisions. Neither series is included in or has any impact on the Consumer Confidence Index.The switch to the Census X-12 seasonal adjustment program produced only minor differences for both levels and month-to-month changes. As a result, The Conference Board did not find it necessary to undertake a full historical revision of the CCI time series based on the seasonal adjustment method. The restated data for November 2010, December 2010 and January 2011 (preliminary data) are based on the prior seasonal adjustment method. This index is an average of responses to the following questions: 1. Respondents appraisal of current business conditions. 2. Respondents expectations regarding business conditions six months hence. 3. Respondents appraisal of the current employment conditions. 4. Respondents expectations regarding employment conditions six months hence. 5. Respondents expectations regarding their total family income six months hence. For each of the 5 questions, there are three response options: Postive, Negative and Neutral. The response proportions to each question are seasonally adjusted. For each of the five question (above), the POSITIVE figure is divided by the sum of the POSITIVE and NEGATIVE to yield a proportion, which we call the ‘RELATIVE’ value. For each question, the average RELATIVE for the calendar year 1985 is then used as a benchmark to yield the INDEX value for that question. From 1967 to mid 1977 the CCI was bi-monthly.
This is a survey based on a probability-design random sample – conducted for The Conference Board by Nielsen. Surveys are a quantification of opinion rather than facts and data.
Observers of consumer sentiment polls should be aware they are imperfect quantifications of opinion. The question arises whether they are a rear view window or a forward looking indicator – or possibly a little of each. There is little question, however, that poor consumer sentiment corresponds to poor economic performance. Econintersect believes that consumer sentiment is mostly a coincident or lagging economic indicator.