This is why you shouldn’t pay attention to consumer confidence indicators

November 20, 2013

Hey, remember that time the federal government shut down, there was a debt-ceiling standoff, and consumer confidence got hammered?

It was a pretty nasty affair. Took up the whole first half of October. The Conference Board's consumer confidence index plummeted from 71.2 from 80.2, battering the fragile psyche of American households.

Now we have some more solid data on what exactly consumers did in October. And it turns out that, well, the effect was something approaching zero. Retail sales rose 0.4 percent, the Commerce Department said. Excluding volatile auto sales, the number was up 0.2 percent. Both numbers beat analysts' expectations.

On one level, this is a reminder that consumer confidence surveys have a quite poor track record of predicting actual economic activity. Here's the chart comparing percent change in the University of Michigan's consumer sentiment index with percent change in personal consumption expenditures.


Source: University of Michigan and Bureau of Economic Analysis, via St. Louis Fed's FRED database

The two have only a 4.5 percent correlation from 1978 through the present, meaning that knowing what happened to one tells you pretty much nothing about what happened to the other.

It is true that the last time there was a debt-ceiling standoff, there was a measurable decline in consumer spending and other real economic measures. But that also occurred at a time that the euro-zone crisis was at full boil, and the combination of the two created massive stock-market volatility. This time around, there were some rumbles in the financial markets, but nothing dramatic. Measures of market volatility got nowhere near their July 2011 levels.

In other words, it seems to be the case that these debt standoffs affect actual consumer behavior -- and thus economic growth -- only through financial-market channels, rather than directly. No one would argue that such episodes are good for the economy, exactly. Over time they can have a damaging impact on psychology that doesn't show up in any one month's numbers.

But in terms of immediate economic impact, as long as markets don't panic, neither do consumers.

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Neil Irwin · November 20, 2013