August 31, 2004
Consumer Confidence Takes a Dive
The Conference Board announced today that its Consumer Confidence Index fell to 98.2 in August (from 105.7) in July: www.conference-board.org/economics/consumerConfidence.cfm.
The index has components measuring both survey respondents' assessment of current conditions and their expectations of future conditions. Both components took a hit last month.
The importance of these measures is still a matter of some debate among economists. Yash Mehra and Elliot Martin from the Richmond Fed have recently argued that consumer sentiment is useful in forecasting consumer spending because it is tells us something about consumer expectations of future income, but not because it signals some independent influence on consumer behavior. To put it another way, if we have a good separate measure of households' expectations of future economic conditions, the consumer confidence index per se is not likely to improve our forecasts of retail sales, and so on. (In the econ-geek speak of our 33840 model: A change in consumer confidence represents a shock to expected future income, and not the quantity of consumption households desire for given levels of interest rates and perceived wealth).
Jason Bram and Sydney Ludvigson might, however, say not so fast. Mehra and Martin come to their conclusion based on the University of Michigan's Index of Consumer Sentiment, not the Conference Board's confidence index. Writing in the June 1998 edition ot the New York Fed's Economic Policy Review, Bram and Ludvigson claim that, as a general matter, the Michigan index is the wrong one to use. The Conference Board index, according to them, has superior forecasting properties.
The two articles require some knowledge of basic statistical methods, but even without delving into details you can pretty much get the gist of things. The Bram and Ludvgson article, in particular, has a nice discussion of the differences between the two measures.
The Mehra and Martin article can be found here: www.rich.frb.org/pubs/economic_quarterly/pdfs/fall2003/mehra.pdf;
The Bram-Ludvigson article is here: www.newyorkfed.org/research/epr/98v04n2/9806bram.pdf