- As it dips to multi-year lows, the Consumer Confidence Index all but commands top media billing when it's released.
- Though surely an attention-getter, the index carries no predictive ability for stocks or the economy.
- A closer look at the index shows why.
If something tumbles, slides, falls or plummets, it's seen as bad. Such is the direction of the Consumer Confidence Index as portrayed by recent headlines:
Consumer Confidence Tumbles
By Dan Molinski, The Wall Street Journal
U.S. Economy: Consumer Confidence Slides as Home Values Decline
By Bob Willis, Bloomberg
Consumer Confidence: Worst since '92
By Catherine Clifford, CNNMoney
Consumer confidence fell again in May, this time to its lowest level since 1992. Headlines continue to lament rising energy costs, weaker employment prospects, inflation fears, and the housing slump. But how does the index measure consumer confidence, and what does it tell us about the future direction of the stock market and the economy? Given the fact many portray the index as a crystal ball, you'd think it holds some semblance of clairvoyance. Surely an index garnering such intent media focus deserves some examination.
Every month the Conference Board surveys 5,000 US households. How many questions do you think they ask to arrive at their finely-tuned analysis of consumer confidence? Fifty? One hundred? Five hundred? Try five. Participants are asked to answer each question as positive, neutral or negative.
• How do you rate current business conditions?
• How do you rate the current employment situation?
• What are your expectations for business conditions in six months?
• What are your expectations for the general employment situation in six months?
• What are your expectations for your personal income in six months?
That's it! That's what all the fuss is about. Five measly questions.
One obvious point is the index, like other economic indicators, is a survey—not hard data. It accounts for how folks feel about things as they are now and what they expect in the near future. Naturally, how folks feel now is mostly based on what's happening now or what just happened. Note: Feelings about how things currently are may not be an accurate barometer. Throughout history, we see frequently that folks feel most dour when things are fine economically, and vice versa. Another way to look at this: Folks were almost uniformly euphoric throughout 2000 and into 2001, just as a bear market was beginning and the economy was about to enter recession.
And even if the information gathered in this survey were correct, how does any of it tell us what's going to happen six months or even six days from now? Put simply, it doesn't! Given the nature of the survey, it's clear the indicator can only be backward-looking or coincident at best. To say this index tells us what lies ahead for the economy and the markets is like saying past stock performance is indicative of future performance. And, as we all know (or should know), it just ain't true!
The US economy could continue slowing, or it could surge. Who knows? Either way, the Consumer Confidence Index will only provide an indication of how folks feel about it. Furthermore, other than 1992, one needs to go back to 1982 to find similar lows in the index's reading. Both instances turned out to be spectacular times to invest—before multi-year positive returns for US stocks.
For those interested, the Conference Board's press release can be found here:
Also, you can find the Conference Board's survey questions here: