Understanding the Market

One of the biggest problems facing an economic analyst is the lack of timeliness of published data. Most economic numbers are published a month or two after the data are collected, due to the difficulty in collecting and assembling the data (for example

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, the CPI measures the prices of 80,000 goods and the employment report surveys 60,000 households and 160,000 businesses; both reports are released between three weeks and a month after the surveys are conducted). Measuring what people have done in an economy of 300,000,000 residents is hard work. It is much simpler to contact a small group of Americans and ask them how they are feeling.

The reports on how Americans are feeling are called surveys of consumer confidence or sentiment. There are two main measures of consumer sentiment, the Conference Board and the University of Michigan. The Conference Board publishes (among other data) the Consumer Confidence Survey (available by subscription, see here for a sample issue) that asks 5,000 households by mail how they are feeling (see here for a description of the Conference Board methodology, which I can no longer find on their website). The University of Michigan Survey Research Center (see here for past data and survey description, registration required) does 500 telephone interviews asking people in the mainland U.S. (residents of Alaska and Hawaii are excluded) about their perception of the current and future state of the economy.

The obvious advantage of these data is that they can be published almost immediately. The obvious disadvantage is that the data are measuring what people say and not what they are doing. While both entities have published studies demonstrating the usefulness of their data, there are numerous skeptics (see here for one) who argue that at best confidence surveys reflect the current economic situation but are not good at predicting the future. An earlier, more careful study (see here) finds some evidence that the Conference Board data can be useful at predicting consumer spending (but note that one of the co-authors is a former employee of the Conference Board, see here). But more recent studies (see here) are considerably more skeptical. Recent Conference Board data (see here) show that confidence was at a relatively high level as recently as July 2007, just before the subprime problems affected markets and the price of petroleum started to climb.

There is a third confidence measure published by the Washington Post/ABC News that appears weekly that does not attract as much attention as the two monthly surveys. The survey does telephone interviews with 1000 randomly selected adults (see here for details) and data are released every Tuesday evening at 5pm. You can examine past polling data here or see a table of past data here. If you look at the historical data, you will find out that the answer to the question “Would you describe the state of the nation’s economy these days as excellent

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, good, not so good, or poor?” is generally “not so good” or “poor”. From 1986 to 2007, there were only five years when a majority of respondents described the economy as excellent or good

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, from 1997 to 2001. While there are numerous problems in the US, this view seems overly pessimistic.

There are other measures of how consumers feel about the economy (available here; there are also a large number of polls on more traditional topics such as politics) but these days markets seem to attach little weight to these surveys.

The media report the confidence data as if they represent important news; see here for a newspaper article about the July 2007 surge in the Conference Board consumer confidence index. While forecasting the economy is always difficult, economists who believed that “[the] rebound in confidence suggests economic activity may gather a little momentum in the coming months” probably made worse forecasts than economists who ignored the report.

This entry was posted on Wednesday, July 9th, 2008 at 9:51 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.